38464 Federal Register / Vol. 76, No. 126 / Thursday, June 30, 2011 / Rules and Regulations

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1 38464 Federal Register / Vol. 76, No. 126 / Thursday, June 30, 2011 / Rules and Regulations DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 24 CFR Parts 30 and 3400 [Docket No. FR 5271 F 03] RIN 2502 A170 SAFE Mortgage Licensing Act: Minimum Licensing Standards and Oversight Responsibilities AGENCY: Office of the Assistant Secretary for Housing Federal Housing Commissioner, HUD. ACTION: Final rule. SUMMARY: This final rule sets forth the minimum standards for the state licensing and registration of residential mortgage loan originators, requirements for operating the Nationwide Mortgage Licensing System and Registry (NMLSR), and HUD s Federal oversight responsibilities pursuant to the Secure and Fair Enforcement Mortgage Licensing Act of 2008 (SAFE Act or Act), to ensure proper monitoring and enforcement of states compliance with statutory requirements. This 2008 law directs states to adopt loan originator licensing and registration requirements that meet the minimum standards specified in the SAFE Act. In addition to codifying the minimum licensing standards and HUD s oversight responsibilities under the SAFE Act, this rule also clarifies or interprets certain statutory provisions that pertain to the scope of the SAFE Act s licensing requirements, and other requirements that pertain to the implementation, oversight, and enforcement responsibilities of the states. DATES: Effective Date: August 29, FOR FURTHER INFORMATION CONTACT: Kevin L. Stevens, SAFE Act Office, Office of Housing; Room 3151; telephone number (this is not a toll-free number). For legal questions, contact Paul S. Ceja, Assistant General Counsel, or Joan L. Kayagil, Deputy Assistant General Counsel, SAFE RESPA Division, Room 9262; telephone (202) Persons with hearing or speech impairments may access this number via TTY by calling the toll-free Federal Relay Service at The address for the above listed persons is: Department of Housing and Urban Development, 451 7th Street, SW., Washington, DC SUPPLEMENTARY INFORMATION: I. Overview of the SAFE Act The Housing and Economic Recovery Act of 2008 (Pub. L , approved July 30, 2008) (HERA) is comprised of several significant housing laws that address the dramatic rise in mortgage delinquencies and foreclosures in the residential mortgage market. Included among these new laws is the SAFE Act. The SAFE Act establishes the minimum standards for state licensing of residential mortgage loan originators in order to increase uniformity, improve accountability of loan originators, combat fraud, and enhance consumer protections. The SAFE Act also requires states to participate in the NMLSR. As noted earlier, the SAFE Act encourages CSBS and AARMR to establish and maintain the NMLSR, and these organizations have established such a system, which is being used by states to license and register residential mortgage loan originators. The CSBS and AARMR system is available online, 1 and consumers will soon be able to access free information regarding the status and employment history of all statelicensed and federally loan originators, as well as any disciplinary and enforcement actions against them on an additional Web site. 2 The SAFE Act, as enacted in 2008, charged HUD with oversight of states compliance with the Act. The SAFE Act also charged HUD to establish and maintain a licensing and registration system for a state or territory that does not have a system in place for licensing loan originators that meets the requirements of the SAFE Act, or that fails to participate in the NMLSR. To operate in any state where HUD (or subsequently, the Bureau) has had to establish such a licensing and registration system (a Federal SAFE Actcompliant licensing system), a loan originator would have to comply with the requirements of the Federal SAFE Act-compliant licensing system for that state, as set forth in this final rule, as well as with any applicable state requirements. A license for a loan originator in a particular state issued under a Federal SAFE Act-compliant licensing system would be valid only for that state, even if a Federal SAFE Actcompliant licensing system must be established in several states. Additionally, if a determination is made that the NMLSR is failing to meet the requirements and purposes of the SAFE Act, HUD or the new Bureau must establish a nationwide licensing and registration system that meets the requirements of the Act. In addition to developing the NMLSR, CSBS and AARMR developed model legislation 3 to aid states compliance VerDate Mar<15> :56 Jun 29, 2011 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\30JNR2.SGM 30JNR2 with the requirements of the SAFE Act. CSBS and AARMR requested that HUD review the model legislation, and that HUD advise of the model legislation s sufficiency in meeting the applicable minimum requirements of the SAFE Act. HUD reviewed the model legislation and advised the public that the model legislation offers an approach that meets or exceeds the minimum requirements of the SAFE Act and that states that adopt and implement a state licensing system that follows the provisions of the model legislation, whether by statute or regulation, will be presumed to have met the applicable minimum statutory requirements of the SAFE Act. In advising the public of its assessment of the model legislation, HUD also presented its views and interpretations of certain statutory provisions that required consideration and analysis in determining whether the model legislation meets the minimum requirements of the SAFE Act. These views and interpretations, referred to as HUD s Commentary (or Commentary), 4 were discussed in HUD s December 2009 proposed rule and are referenced in this final rule, with further elaboration and clarification as determined appropriate and in response to public comment. The SAFE Act also requires the Office of the Comptroller of the Currency of the Department of the Treasury, the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the Office of Thrift Supervision of the Department of the Treasury, the Farm Credit Administration (FCA), and the National Credit Union Administration (collectively, the Federal banking agencies), through the Federal Financial Institutions Examination Council (FFIEC) and the FCA, to develop, implement, and maintain a Federal registration system for employees of an institution regulated by one (or more) of the Federal banking agencies. The Federal banking agencies published their final rule to implement this registration system on July 28, 2010 (75 FR 44656; corrected and republished at 75 FR 51623, August 23, 2010). The SAFE Act specifically prohibits, with certain exceptions, an individual employed by an agency-regulated institution from engaging in the business of a residential mortgage loan originator without first obtaining a unique identifier and registering and annually maintaining registration as a 4 HUD s Commentary can be found at (See also HUD s Federal Register notice published on January 5, 2009, at 74 FR 312, advising of the availability of the model legislation and HUD s Commentary.)

2 Federal Register / Vol. 76, No. 126 / Thursday, June 30, 2011 / Rules and Regulations registered mortgage loan originator. The Federal banking agencies published their final rule to implement this registration system on July 28, 2010 (75 FR 44656). The SAFE Act was amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L , approved July 21, 2010) (Dodd- Frank Act), and the authorities and duties delegated to HUD by the SAFE Act will be transferred on July 21, 2011, to the new Consumer Financial Protection Bureau (the Bureau) established by the Dodd-Frank Act. Accordingly, references to HUD s authorities and duties throughout this final rule should be understood to refer to the authorities and responsibilities of the Bureau once the transfer occurs. II. HUD s December 2009 Proposed Rule On December 15, 2009, at 74 FR 66548, HUD published a proposed rule to clarify HUD s responsibilities under the SAFE Act and the minimum standards that the SAFE Act provides for states to meet in licensing loan originators. The proposed rule provided proposed clarifications and interpretations of certain statutory provisions that pertain to the scope of the SAFE Act licensing requirements, and other requirements that pertain to the implementation, oversight, and enforcement responsibilities of the states. In addition, the proposed rule provided the procedure that would be used to determine whether a state s licensing and registration system is SAFE Act compliant, the actions that HUD would take if it determined that a state has not established a SAFE Actcompliant licensing and registration system or that the NMLSR established by CSBS and AARMR is not SAFE Act compliant, the minimum requirements for the administration of the NMLSR, and enforcement authority to be utilized in the administration of a Federal licensing and registration system. Through the proposed rule, HUD solicited public comment and suggestions on the proposed clarifications and regulations. On February 17, 2010, HUD published a notice 5 extending the public comment period until March 5, 2010, due to severe inclement weather conditions and closures of government and private organizations that may have prevented many members of the public from submitting comments. A more detailed discussion of HUD s December 15, 2009, proposed rule can be found at 74 FR through FR of the December 15, 2009, edition of the Federal Register. III. Overview of Final Rule Key Clarifications After reviewing issues raised by the commenters, which are discussed in Section IV of this preamble, and upon HUD s further consideration of issues related to this final rule, the following highlights key clarifications made by this final rule. An individual required to be licensed under the SAFE Act is an individual who is engaged in the business of a loan originator ; that is, an individual who acts as a residential mortgage loan originator with respect to financing that is provided in a commercial context and with some degree of habitualness or repetition. The SAFE Act defines loan originator to mean an individual who takes a residential mortgage loan application; and offers or negotiates the terms of a residential mortgage loan for compensation or gain. Section 1504(a) of the SAFE Act requires licensing of those individuals who engage in the business of a loan originator. It is HUD s view that the SAFE Act s distinction between individuals who may meet the definition of loan originator (because of the activities they carry out) versus those individuals who engage in the business of a loan originator, means that not every individual who acts as a loan originator is necessarily subject to the SAFE Act s licensing and registration requirements. A basic definition of business is a commercial enterprise carried on for profit; a particular occupation or employment habitually engaged in for livelihood or gain. (See Black s Law Dictionary 211 (8th ed. 2004).) It is HUD s view that to engage in the business of a loan originator and be subject to licensing under the SAFE Act, an individual must act or hold oneself out as acting as a loan originator with respect to mortgage loan origination activities that are carried out in a commercial context and with some degree of habitualness or repetition. To act in a commercial context, the individual who acts as a loan originator must do so for the purpose of obtaining profit for an entity or individual for which the individual acts (including, e.g., a sole proprietorship or other entity that includes only the individual), rather than exclusively for public, charitable, or family purposes. The requisite habitualness or repetition of the mortgage loan origination activities may be met if either the individual who acts as a loan originator does so with a degree of habitualness or repetition, or if the source of the prospective VerDate Mar<15> :29 Jun 29, 2011 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\30JNR2.SGM 30JNR2 financing provides such financing or performs other phases of originations of residential mortgage loans with a degree of habitualness or repetition. The absence of either a commercial context or a degree of habitualness or repetition means that the activity in which the individual is engaged does not constitute the business of a loan originator. This final rule codifies this distinction at (b)(1) and in an appendix and identifies instances where such absence indicates that an individual is not subject to SAFE Act licensing requirements. An overarching purpose of the SAFE Act is to enhance consumer protection and support anti-fraud measures through establishment of state licensing systems that will ensure that loan originators have the necessary integrity and knowledge needed to perform their functions properly. To accomplish this purpose, the SAFE Act requires, among other things, that an applicant for a state license must provide information demonstrating that he or she will act honestly and fairly, complete courses, and pass a written test on Federal and state laws governing loan origination, ethics, consumer protection, fraud, fair lending, and standards in the nontraditional mortgage product marketplace. Once licensed, a loan originator is required: (1) To continue to meet the minimum licensing standards; (2) to complete continuing education courses; and (3) to ensure the submission of periodic reports on the loans that he or she originates. The SAFE Act seeks to protect consumers from incompetency, fraud, and other abuses by ensuring that individuals who act as a loan originator with the purpose of obtaining profit for another entity and with respect to financing that is provided with some degree of habitualness have received training on and have demonstrated understanding of the applicable legal and ethical obligations. In contrast, consumers are unlikely to need the protections provided by loan originator licensing when an individual acts as a loan originator in a purely public or charitable context, without the purpose of obtaining profit, or who acts as a loan originator with respect to financing that is provided only once or very rarely. The SAFE Act s purposes and licensing requirements apply to individuals who act as loan originators with respect to financing that is provided in a commercial context and with some degree of habitualness or repetition. This final rule includes discussion of a number of cases where the requisite commercial context or habitualness may be absent.

3 38466 Federal Register / Vol. 76, No. 126 / Thursday, June 30, 2011 / Rules and Regulations The SAFE Act does not cover employees of government agencies or housing finance agencies who act as loan originators in accordance with their duties as employees of such agencies. Individuals who act as loan originators as employees of government agencies or of housing finance agencies, as defined 6 by this rule, are not subject to the licensing and registration requirements of the SAFE Act. Many government agencies and housing finance agencies provide direct housing assistance to low- and moderate-income people through residential mortgage loans with favorable terms. The entities that administer such government housing assistance include Federal, state, and local governments and housing finance agencies. These government entities are generally granted authority and funding and are overseen by Congress, state legislatures, or municipal councils, and are presumed to carry out their activities for the benefit of the borrowers they serve. Their employees act as loan originators in accordance with strict agency policies and pursuant to highly prescriptive statutory and regulatory requirements that Federal, state, and local government public officials or elected representatives have determined are consistent with the public interest and provide adequate protections for borrowers. An individual s status as an employee of a government agency or housing finance agency ensures that the agency has the power to ensure that all aspects of the individual s conduct are consistent with the public purposes of the agency. Another key distinction between loan originators covered by the SAFE Act and government employees administering government assistance is the pecuniary purpose for acting as a loan originator. Loan originators working in a commercial context undertake their activities in order to further the financial interests of the entity for which they work. In contrast, government agencies and housing finance agencies that carry out housing finance programs generally do so without the purpose of obtaining profit for any entity. For these reasons, the requisite commercial context is lacking and, as a result, these individuals do not engage in the business of a loan originator. 6 Housing finance agency means any authority that is chartered by a state to help meet the affordable housing needs of the residents of the state, is supervised directly or indirectly by the state government, is subject to audit and review by the state in which it operates, and whose activities make it eligible to be a member of the National Council of State Housing Agencies. Consequently, the SAFE Act definition of a loan originator does not encompass governmental employees, and governmental employees are not required to obtain a state license and registration for any loan origination under a government housing assistance program. To ensure that all of the individual s actions in the course of acting as a loan originator are subject to the control of the agency or housing finance agency and are consistent with the agency s public or government mission, the individual must be an employee of the agency. However, the fact that a prospective residential mortgage loan is to be insured or guaranteed under a government program does not mean that the individual acting as a loan originator with respect to the loan is not covered by the SAFE Act. For example, loan originators working for entities that originate residential mortgage loans under the mortgage insurance programs or loan guarantee programs of the Federal Housing Administration or the Department of Veterans Affairs are generally covered by the licensing and registration requirements of the SAFE Act. While these mortgage insurance and loan guarantee programs were created by Federal statute, and are governed by Federal regulations, the individuals who act as loan originators with respect to these governmentinsured loans generally do so in the commercial context, in part because they generally do so for the purpose of obtaining profit for the entity for which they work (including, e.g., a sole proprietorship or other entity that includes only the individual). Since these loans are originated in a commercial context, the loan originators are generally subject to state licensing and registration requirements. The SAFE Act does not cover employees of bona fide nonprofit organizations who act as loan originators with respect to residential mortgage loans outside a commercial context. Individuals who act as loan originators with respect to certain kinds of loans as employees of bona fide nonprofit organizations, as defined by this final rule, are not subject to the licensing and registration requirements of the SAFE Act. Under the circumstances defined in this final rule, such individuals are similar to government employees who act as loan originators pursuant to governmentfunded and regulated housing assistance programs, in that employees of a bona fide nonprofit organization who act as loan originators do so for public or charitable purposes, and not for the profit of another individual or entity. VerDate Mar<15> :29 Jun 29, 2011 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\30JNR2.SGM 30JNR2 Employees of bona fide nonprofit organizations who act as loan originators do not act in a commercial context and consequently are not covered by the SAFE Act. HUD recognizes that the mere fact of an organization s 501(c)(3) status is insufficient to conclude that its employees who act as loan originators necessarily do so for the benefit of the borrower and for public or charitable purposes, rather than for the profit of the organization or another entity or individual. Instead, the organization s activities, purpose, incentive structures, and loan products must be considered in order to determine that its employees who act as loan originators do so outside of a commercial context. Accordingly, this final rule provides that an organization is considered to be a bona fide nonprofit organization if the organization demonstrates to the satisfaction of the applicable regulator that the organization: (1) Maintains tax-exempt status under section 501(c)(3) of the Internal Revenue Code of 1986; (2) Promotes affordable housing or provides homeownership education, or similar services; (3) Conducts its activities in a manner that serves public or charitable purposes; (4) Receives funding and revenue and charges fees in a manner that does not incentivize the organization or its employees to act other than in the best interests of its clients; (5) Compensates employees in a manner that does not incentivize employees to act other than in the best interests of its clients; (6) Provides to or identifies for the borrower residential mortgage loans with terms that are favorable to the borrower and comparable to mortgage loans and housing assistance provided under government housing assistance programs; and (7) Meets such other standards that the state determines appropriate. With respect to whether particular mortgage terms are favorable to borrowers, the applicable regulator should examine the interest rate that the home loan would carry; the charges that are imposed on the borrower for origination, application, closing and other costs; whether the mortgage includes any predatory characteristics; the borrower s ability to repay the loan; and the term of the mortgage. Finally, to ensure that all of the individual s actions in the course of acting as a loan originator are subject to the control of the bona fide nonprofit organization and are consistent with the organization s mission and practices,

4 Federal Register / Vol. 76, No. 126 / Thursday, June 30, 2011 / Rules and Regulations the individual must be an employee of the organization and must be acting within the scope of his or her employment on behalf of the organization. (Applicability of SAFE Act licensing requirements to volunteers is addressed below under the section of this preamble that addresses for compensation or gain. ) An individual selling his or her own residence is not engaged in the business of loan originator. As the foregoing clarifications highlight, the SAFE Act requires licensing of individuals engaged in the business of a loan originator, and the statutory phrasing of who is required to be licensed reflects a habitualness and commercial context, both of which are likely absent in the case of a homeowner financing the sale of his or her own residence, whether such residence is the homeowner s principal residence or a vacation property. As HUD stated in the proposed rule, the frequency with which a particular seller provides financing to a buyer to facilitate the sale of the seller s own residence is so limited that Congress could not have intended to require such sellers to obtain loan originator licenses. This final rule confirms and more clearly applies this point by adding the concept of habitualness or repetition expressly into the language on engages in the business of a loan originator in (b) of the rule. However, as discussed later in this preamble, a remaining issue with respect to seller financing is when the infrequency with which an owner finances the sale of properties other than his or her residence, along with other factors, indicate that an individual is not engaged in the business of a loan originator, either because the transactions requisite commercial context or habitualness, or both, are absent. HUD received a large number of public comments suggesting that an individual should be able to provide financing pursuant to the sale of any property the individual owns, regardless of whether property served as the seller s residence. As further discussed below, some commenters stated that seller financing should be permitted for a limited number of such properties, while others stated that financing the sales of an unlimited number of such properties should be permitted, without subjecting the provider of the financing to SAFE Act licensing requirements. HUD appreciates the concerns of the commenters and agrees that there may be cases where the seller of a property or properties in which the seller has never lived may provide financing for the sale without the seller s acts arising to engag[ing] in the business of a loan originator. While the fact that the seller has not lived in the properties makes it more likely that financing is provided in order to obtain a profit, and therefore makes it more likely that a commercial context is present, the infrequency with which a particular seller undertakes such actions, combined with the fact that it is the individual who is providing the financing (rather than a business entity that regularly provides financing), may mean that the requisite habitualness needed to constitute engage[ing] in the business of a loan originator is absent. However, HUD is unable to state how often an individual may undertake such transactions before the requisite habitualness is met. Despite the requests of many commenters, HUD has no authority under the SAFE Act to exempt from licensing requirements individuals who engage in the business of a loan originator. For example, HUD has no authority under the SAFE Act to establish a de minimis exemption that would shield individuals who do engage in the business of a loan originator from the SAFE Act s licensing requirements, but who do so infrequently. The SAFE Act expressly provides the Federal banking agencies with such authority but does not provide comparable authority to HUD. Accordingly, although HUD agrees that an individual must act as a loan originator with respect to financing that is provided or other origination activities that are performed with some degree of habitualness in order to engage in the business of a loan originator, HUD is unable to state how frequently an individual, including an individual providing financing for the sale of a property, must so act in order to meet the requisite degree of habitualness. HUD lacks statutory authority to grant exemptions to licensing under the SAFE Act. As also discussed later in this preamble, many commenters sought exemption from licensing under the SAFE Act for various reasons. HUD has no authority under the SAFE Act to exempt individuals engaging in the business of a loan originator. Removal of activities that are not specified in statute as activities exempt from licensing under the SAFE Act. HUD is removing from (e), which pertains to individuals who do not need to be licensed under the SAFE Act, references to individuals who offer and negotiate terms of a residential mortgage loan with or on behalf of a family member, an individual who only offers or negotiates terms of a residential mortgage loan secured by a dwelling VerDate Mar<15> :29 Jun 29, 2011 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\30JNR2.SGM 30JNR2 that serves as the individual s residence, and a licensed attorney who only negotiates the terms of a residential mortgage loan on behalf of a client as an ancillary matter to the attorney s representation of a client. HUD s position remains that these activities do not constitute engaging in the business of a loan originator and are not subject to licensing under the SAFE Act. HUD believes that the inclusion of these activities in the regulation as activities not covered by the SAFE Act triggered the high volume of comments that addressed issues such as how many residences an owner may sell and finance before the owner may need to be licensed under the SAFE Act, and what HUD means by immediate family member. Accordingly, a discussion of these activities, which includes examples of activities that do not fall under SAFE Act coverage, as well as activities that serve as examples of activities that do fall under SAFE Act coverage, has been moved to an Appendix of this final rule. This approach is consistent with that of the Federal banking agencies in their SAFE Act final rule, which included an analogous appendix that address activities that do or do not subject an individual to SAFE Act requirements. Activities, not the label of the transaction or professional title of an individual, determine SAFE Act coverage. As also discussed later in this preamble, many commenters submitted the titles of various professions and asked whether such professions had to be licensed under the SAFE Act. It is the activities that an individual undertakes, not the individual s title, that determines coverage under the SAFE Act. If one is engaged in the business of a loan originator, then regardless of what other title one may have, the individual is subject to licensing under the SAFE Act. Deferral to the Bureau for a determination of coverage of individuals involved in material mortgage modifications. The final rule does not include licensing of those individuals engaged in material or significant modifications to residential mortgage loans or those individuals working as third-party loan modification specialists. Although HUD considered licensing of such individuals, and specifically solicited comment on coverage of loan modifications that result in material modifications to homeowners mortgages, HUD, in this final rule, does not define loan originator or business of a mortgage loan originator to include individuals who engage in loan modifications or are third-party loan modification

5 38468 Federal Register / Vol. 76, No. 126 / Thursday, June 30, 2011 / Rules and Regulations specialists. HUD leaves to the Bureau the issue of whether such individuals should be licensed under the SAFE Act. HUD notes that the new Bureau has independent authority under the Dodd- Frank Act to regulate loan modification and loan servicing practices. However, it is important to note that those individuals involved in refinance transactions are subject to licensing under the SAFE Act. A refinancing results in a new loan, not a modified loan. Appendix of activities that constitute or do not constitute engag[ing] in the business of a loan originator. As noted earlier, HUD includes in this final rule an appendix that provides examples of activities that would subject an individual to licensing under the SAFE Act, or that do not fall under coverage of the SAFE Act. Technical and additional clarifying changes. In addition to the clarifications highlighted above, this final rule also includes technical and minor clarifying changes to certain definitions and provisions. These changes are in response to ambiguities raised by commenters, and are further discussed below in section IV of this preamble. Among them are technical changes to the regulatory provisions clarifying takes an application, offers or negotiates, employee, state, the requirement to pass a test after a lapse of a loan originator license of five or more years, the requirement to authorize the NMLSR to obtain required information, and the full name of the accreditation program for state supervisory authorities. A definition is provided for the term origination of a residential mortgage loan, which is, in turn, included in the definition of loan processor or underwriter. Section is also revised to clarify that HUD would not impose civil money penalties for violations of state law, in a state where HUD has established a system for the licensing and registration of loan originators. IV. Discussion of Public Comments A. The Comments, Generally The public comment period on this proposed rule closed on March 5, 2010, and HUD received 5,132 public comments in response to the December 2009 proposed rule. Comments were submitted by individuals; state regulatory agencies; other units of state and local government; industry associations; mortgage-lending institutions; mortgage loan servicers; nonprofit housing counseling, lending, and community development organizations; broker-dealers that employ financial advisors; manufactured housing retailers, lenders, and community owners; and attorneys and law firms. The overwhelming majority of the comments were directed to various types of residential mortgage loan transactions and asked HUD to clarify whether the individuals involved in those transactions are required to be licensed under the SAFE Act. This Section IV of the preamble sets out significant comments raised by the public commenters and HUD s responses to these comments, and identifies where HUD has made technical changes to the regulations as set forth in the proposed rule. B. Key Definitions: Taking an Application, Offers or Negotiates, Compensation or Gain, and Engaging in the Business of a Loan Originator Comment: More detailed or revised definitions are needed for key terms that determine whether an individual is covered. Several commenters requested that HUD elaborate on its definitions of takes an application, offers or negotiates, and for compensation or gain. Commenters stated that without further refinement, these terms, as presented in the proposed rule, capture or appear to capture: (1) Activities that are not loan origination activities, or (2) individuals who are not loan originators. A number of commenters asserted that the proposed definition changes the statutory definition of loan originator, which requires that an individual take a residential mortgage loan application and offer or negotiate the terms of a residential mortgage loan for compensation or gain, into an or definition, thus requiring satisfaction of only one of the two prongs noted above. Another commenter stated that HUD should not include the provision that an individual engages in the business of a loan originator by representing to the public that such an individual can or will perform the activities of a loan originator. With respect to the term takes an application, a commenter stated that the definition of application needs to be more precise to clarify that taking an application does not encompass the mere physical handling or transmitting of a completed form to a lender. Another commenter stated that HUD should clarify that the and in the proposed definition of application is conjunctive; that is, an application consists of both the request for an offer of a loan and the information about a borrower that is customary or necessary. Another commenter stated that deciding whether to extend an offer of credit, or VerDate Mar<15> :29 Jun 29, 2011 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\30JNR2.SGM 30JNR2 influencing the decision of another, is not part of the origination function and could be viewed as inappropriate for a loan originator. This commenter states that taking an application and collecting information from the applicant that will be used to determine whether or not to grant the mortgage loan should be the only stated factors in proposed (c)(1). Another commenter urged HUD to withdraw its interpretation of the term application set forth in the proposed rule, and instead retain the definition of application that is found in the Real Estate Settlement Procedures Act (RESPA), Regulation X (24 CFR ). With respect to the term offers or negotiates, commenters identified activities that occur in the context of the manufactured housing retail industry or other contexts and asked HUD to clarify that they do not constitute offering or negotiating, such as: (a) The mere sharing of general information about a financing source; (b) acting as a conduit between the homebuyer and the financing source without engaging in specific discussion of financing options from a particular funding source; (c) discussing hypothetical financing options, i.e., options not related to a specific financing source; (d) presenting a spectrum of options; (e) giving the homebuyer a list of available financing sources without recommending any of the sources; (f) discussing a buyer s ability to afford a home; (g) discussing various alternative financing options; (h) presenting or discussing generic facts sheet or generic rate sheets; and (i) closing personal property transactions. The commenters reasoned that these activities are not covered because under HUD s proposed first prong in the provision on offer[ing] or negotiate[ing], an individual can present loan terms to a borrower for acceptance only if the terms are capable of being accepted under contract law. The commenters stated that similarly, under HUD s proposed second prong in the provision on offer[ing] or negotiate[ing], an individual communicates with a borrower to reach a mutual understanding only if the activity amounts to achieving mutuality under contract law. Several commenters believed that the proposed provisions clarifying the terms offer[ing] or negotiate[ing] left too much ambiguity or risked coverage of activities that the commenters believed should not be covered. Commenters specifically questioned HUD s proposed third prong, which provided that an individual offers or negotiates terms of a residential mortgage loan by referring the prospective borrower to a particular

6 Federal Register / Vol. 76, No. 126 / Thursday, June 30, 2011 / Rules and Regulations lender or set of loan terms in accordance with a duty to or incentive from any person other than the prospective borrower. Some commenters worried that under this third proposed prong, licensing requirements could be triggered by a casual conversation in which an individual recommends a lender, by indicating the name of a lender on the individual s business card, or implying generically that a particular lender may be able to meet a prospective borrower s needs. Another commenter stated that HUD s third prong does not cover a manufactured home retailer who forwards an application to a limited number of lenders, and that the duty or incentive refers only to duties to or incentives from a financing source, and not to a commission that the individual may receive as a result of selling the home. With respect to the term for compensation or gain, as in the case of the comments submitted on taking an application, and offers or negotiates, commenters generally did not offer a definition for this term but offered examples of activities that the commenters believe should fall outside of the scope of for compensation or gain. Some commenters stated that for compensation or gain requires a nexus between the compensation or gain and the offering or negotiating activity, or should include only a commission that is contingent on the closing of a loan or sale, and not salary. Commenters stated that the following should be clarified as not constituting activities that are undertaken for compensation or gain under the SAFE Act: (a) A salesperson s commission for the sale of a manufactured home to the extent that the commission is the same in a cash transaction and in a financed transaction; and (b) any benefit that is the same in a financed transaction as in a cash transaction. Other commenters recommended that the term for compensation or gain be defined to exclude an employee of a 501(c)(3) or government organization that will receive no gain or benefit from the transaction. The majority of commenters who provided suggestions on how these terms should be revised or clarified did so in the context of various categories of professions that should be excluded from coverage under the SAFE Act. HUD Response: The definitions of tak[ing] a residential mortgage loan application, offer[ing] or negotiate[ing] terms of a residential mortgage loan, and for compensation or gains largely determine whether or not a particular individual is subject to licensing requirements, and HUD specifically solicited comment on the definitions provided in the proposed rule. Takes an application. HUD s proposed rule provided that application includes any request from a borrower, however communicated, for an offer (or in response to a solicitation of an offer) of residential mortgage loan terms, as well as the information from the borrower that is typically required in order to make such an offer. The proposed rule provided that HUD views the phrase tak[ing] an application to mean receipt of an application for the purpose of deciding whether or not to extend the requested offer of a loan to the borrower, whether the application is received directly or indirectly from the borrower. HUD stated that it generally would not be possible for an individual to offer or negotiate residential mortgage loan terms without first receiving the request from the borrower, as well as the information typically contained in a borrower s application. Accordingly, the provision retained in (c)(1) of this final rule, which provides that an individual takes an application, whether he or she receives it directly or indirectly from the borrower, means that an individual who offers or negotiates residential mortgage loan terms for compensation or gain cannot avoid licensing requirements merely by having another person physically receive the application from the prospective borrower and then pass the application to the individual. HUD disagrees that this clarification converts the statutory two-pronged and definition into an or definition that is met by satisfying only one prong. (The commenter may be confusing the Model State Law with HUD s proposed rule.) Instead, the clarification merely prevents subversion of the SAFE Act s licensing regime through use of a straw man, and recognizes that it is the act of offering or negotiating residential mortgage loan terms for compensation or gain in conjunction with receipt of an application that subjects an individual to licensing requirements. An individual who merely takes an application, but never offers or negotiates loan terms, is not required to be subject to licensing by the SAFE Act. Similarly, a person who makes an offer of loan terms without ever receiving, directly or indirectly, an application from the borrower, is not required to be covered by the SAFE Act. The proposed rule also provided that HUD interprets the term takes a residential mortgage loan application to exclude an individual whose only role with respect to the application is physically handling a completed VerDate Mar<15> :29 Jun 29, 2011 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\30JNR2.SGM 30JNR2 application form or transmitting a completed form to a lender on behalf of a prospective borrower. This interpretation is consistent with the definition of loan originator in section 1503(3)(A)(ii) of the SAFE Act, and with HUD s above discussion of takes an application. Organizational change. The corresponding provision, regarding administrative or clerical tasks, has been moved to (e)(4) in this final rule for organizational clarity. It is HUD s view that the provisions in the final rule clearly exclude these activities, and that changes requested by some commenters for further clarification are unnecessary. HUD agrees with a commenter s observation that an application consists of both the request for an offer of loan terms and the information about the borrower, as more specifically provided in the definition. HUD s view is that this is made clear by the definition s use of the word and. HUD also agrees that a loan originator s duties generally do not include deciding whether to offer credit, and that use of the word influencing could be read to imply an activity that is generally not appropriate for a loan originator. Rule clarification. To clarify that this was and is not HUD s intended meaning, (c)(1) is revised slightly to clarify that the application is received for the purpose of facilitating a decision whether to extend an offer. Offers or negotiates. HUD advised in the proposed rule that it views the terms offers or negotiates broadly. HUD views these terms as encompassing interactions between an individual and a borrower with respect to prospective loan terms where the individual is likely to seek to further his or her own interests or those of a third party. Accordingly, the proposed rule, in (c)(2), stated that the terms include interactions that are typical between two parties in an arm s length relationship to facilitate the formation of a contract, such as presenting loan terms for acceptance by a prospective borrower and communicating with the borrower for the purpose of reaching an understanding about prospective loan terms. The proposed rule specifically clarified that the third prong of offers or negotiates encompasses actions by an individual that make a prospective borrower more likely to accept a particular set of loan terms or an offer from a particular lender, where the individual may be influenced by a duty to or incentive from any party other than the borrower. Such actions may be functionally equivalent to and have the same effect on the borrower s decision

7 38470 Federal Register / Vol. 76, No. 126 / Thursday, June 30, 2011 / Rules and Regulations as a direct offer or negotiation, but without the borrower s knowledge or understanding that other options may be available. HUD generally agrees with the commenters observation that HUD s proposed first prong of the provision clarifying offers or negotiates, under which an individual presents, for acceptance by a borrower, residential mortgage loan terms, has similarities with an extension of an offer under contract law. Rule clarification. However, to prevent any confusion that might arise as a result of this analogy, HUD is clarifying in this final rule that the offer need not be capable of acceptance at the time it is presented, as an offer typically would be under contract law. As the Federal banking agencies clarified in their final rule, the loan terms presented may be conditional or subject to additional verification, and other steps may remain in completing the loan process. (See, e.g., Appendix A to subpart F of Part 34 Examples of Mortgage Loan Originator Activities, paragraph (b), at 75 FR ) In addition, the individual typically lacks authority to bind the entity that would provide the prospective loan, which is another distinction from an agentprincipal relationship under contract law. Rule clarification. To clarify these distinctions, this final rule provides at (c)(2)(i)(A) that under the first prong, an individual presents the loan terms for consideration rather than for acceptance by a borrower. To prevent any misunderstanding that the prong covers an individual who presents merely generic or illustrative loan terms for general consideration by the borrower, this final rule further clarifies that the individual must present particular residential mortgage loan terms. Through this change, HUD intends to cover the presentation of loan terms that are identified as being prospectively available from one or more lenders to similarly situated prospective borrowers. Similarly, HUD generally agrees with the commenters observation that the proposed second prong of the provision clarifying offers or negotiates, under which an individual communicates with a borrower for the purpose of reaching an understanding about prospective loan terms, is analogous to communications between parties to a prospective transaction that have the purpose of reaching mutuality, as under contract law. Rule clarification. Accordingly, HUD is clarifying at (c)(2)(i)(B) that the purpose of such communications is mutual understanding. However, the individual need not have authority to alter the rate in the course of such communications, and this second prong can be satisfied by communicating with the purpose of reaching mutual understanding, even if such understanding is never in fact achieved. With these clarifications, HUD agrees that in general, the following activities described by the commenter (a) the mere sharing of general information about a financing source; (c) discussing hypothetical financing options, i.e., options not related to a specific financing source; (e) giving the homebuyer a list of available financing sources without recommending any of the sources; (f) discussing a buyer s ability to afford a home; (h) presenting or discussing generic facts or generic rate sheets; and (i) closing personal property transactions would not be covered under offers or negotiates. Whether the commenter s examples of the following activities (b) acting as a conduit between the homebuyer and a financing source without engaging in specific discussion of financing options from a particular funding source; (d) presenting a spectrum of options; and (g) discussing of various alternative financing options would be covered would require additional facts and analysis under the provisions, as explained above. For example, acting as a conduit between the homebuyer and a financing source could constitute a mere administrative task, if the activity consists of merely physically handling or faxing a document in accordance with the unsolicited request of the borrower or of a licensed loan originator, or it could constitute taking an application or offering or negotiating loan terms, depending on the facts and circumstances. HUD disagrees with the commenters who characterized as inappropriate the proposed third prong, which provides that an individual offers or negotiates terms of a residential mortgage loan by referring the prospective borrower to a particular lender or set of loan terms in accordance with a duty to or incentive from any person other than the prospective borrower. HUD cautions that each of the prongs clarifying offers or negotiates must be read in conjunction with the statutory and regulatory provision that an individual must also take an application and that there must be a nexus between the two activities. An individual s generic referral to or recommendation of a particular lender, divorced from any receipt and consideration by the individual of the prospective borrower s application (i.e., his or her request and information that is customary in a VerDate Mar<15> :29 Jun 29, 2011 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\30JNR2.SGM 30JNR2 decision on whether to extend an offer of loan terms), would not likely trigger the third prong. Instead, it would be triggered by an individual s referral to a particular lender or set of loan terms in conjunction with the individual s receipt and consideration of the information received from the borrower. Properly understood in this context, the third prong is simply a specific application of the first prong, under which an individual directly presents for the borrower s consideration particular loan terms that are identified as being available from one or more lenders to similarly situated borrowers. The third prong merely clarifies that, just as with taking an application, the individual cannot avoid applicability of the SAFE Act by bifurcating the function; e.g., by directing the prospective borrower to another individual or entity that will reveal the details of the terms that the first individual has identified as prospectively available to similarly situated borrowers. However, the third prong is further qualified to provide that it applies only to an individual who performs the described function in accordance with a duty to or incentive from a person other than the prospective borrower. This qualification ensures that it does not inadvertently cover individuals who merely provide advice to prospective borrowers in a wholly charitable or disinterested manner. Accordingly, coverage of the commenter s example of a manufactured home retailer who forwards an application to a limited number of lenders would require additional facts and analysis. HUD understands that there may be a limited number of such lenders that serve a particular geographical area, and even fewer that provide financing for a particular class of transaction. While HUD disagrees with the commenter s assertion that the referenced duty to or incentive from refers only to duties to, or incentives directly from a financing source, the inquiry would not end there. Even if an individual faced the prospect of earning a commission or other incentive in connection with the sale of the home, coverage would depend on whether the range of prospective lenders to whom the individual forwarded the application was shaped by, or was in accordance with, the commission or other incentive. If the individual forwarded the application to all prospective lenders known to the individual to provide prospective financing, or a fair sampling of them that is not skewed based on such incentives, then the individual would likely not be covered.

8 Federal Register / Vol. 76, No. 126 / Thursday, June 30, 2011 / Rules and Regulations For compensation or gain. With respect to the term for compensation or gain, the proposed rule defined this term in (c)(2) to include any circumstances in which an individual receives or expects to receive anything of value in connection with offering or negotiating terms of a residential mortgage loan. The term would not be limited to payments that are contingent upon closing a loan. HUD agrees that there must be some nexus between the receipt of money or anything of value and the activity that constitutes offering or negotiating, since HUD has provided that the former must be in connection with the latter. However, HUD disagrees that for compensation or gain should be defined to cover only those transactions that involve a commission that is contingent on the transaction. HUD construes the term broadly to ensure that consumers receive the full protection of the licensing requirements of the SAFE Act, and HUD notes that the Federal banking agencies have followed the same approach in their final rule. (See, e.g., Appendix A to subpart F of Part 34 Examples of Mortgage Loan Originator Activities, paragraph (c)(1), at 75 FR ) An individual who acts as a loan originator purely as a volunteer, such that the individual does not receive or expect to receive anything of value in connection with offering or negotiating terms of a residential mortgage loan, is not subject to SAFE Act licensing requirements. Accordingly, the example of a sales commission received by an individual in the manufactured home retail industry would likely meet the definition of for compensation or gain if it is received or expected to be received in connection with activities that constitute offering or negotiating. However, as discussed above, physically handling an application or other documents or engaging in generic discussions do not necessarily constitute offering or negotiating and, accordingly, may not subject the individual to coverage even if they would otherwise be acting for compensation or gain. Similarly, as discussed below, HUD s analysis of whether employees of certain bona fide nonprofit organizations and government agencies are subject to coverage depends on considerations other than whether they undertake activities for compensation or gain. Rule clarification. For purposes of clarification, HUD adds to (Definitions), a definition for for compensation or gain, which crossreferences to the discussion of this term in (c)(2)(ii). Engaging in the business of a loan originator. HUD disagrees with the commenters who asserted that HUD may not define engag[ing] in the business of a loan originator to include representing to the public that an individual can or will perform the services of a loan originator. HUD is aware that a version of a bill that preceded enactment of the SAFE Act contained a similar provision in the definition of loan originator, and that the SAFE Act as enacted did not include the provision in the definition of loan originator. Congress opted to provide that the test that determines whether an individual is subject to licensing requirements is different from merely whether one meets the definition of a loan originator. Rather, one must engage in the business of a loan originator. HUD declines to ignore this distinction and instead construes the statute s undefined provision in a common-sense manner. As further discussed below, in consideration of applicability of the SAFE Act to government agencies and certain bona fide nonprofit organizations, it is possible for one s activities to meet the literal definition of a loan originator without amounting to engag[ing] in the business of a loan originator. Concomitantly, as is the case in the regulation of other professions such as the practice of law and medicine, this final rule provides that an individual may engage in the business of a loan originator by representing to the public that one can provide the services of a loan originator, even if the individual is lying, otherwise fails to provide such services, or has not yet done so. HUD s position is that the SAFE Act does not require a state supervisory authority to sit idly by until such an individual actually receives all of a prospective borrower s confidential and financial information, disseminates it, and presents loan terms to the borrower, before the individual becomes subject to licensing or enforcement actions. Organizational change. Similar to the approach taken by the Federal banking agencies in their rulemaking, this final rule includes an Appendix that provides examples of activities of someone who is engaged in the business of a loan originator. C. Scope of State Licensing Requirements and the Definition of Employee 1. Comment: Community banks should be distinguished from nondepository mortgage lenders. A commenter states that community banks should be distinguished from VerDate Mar<15> :29 Jun 29, 2011 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\30JNR2.SGM 30JNR2 nondepository mortgage lenders because community banks are already highly regulated and are more invested in the communities they serve. HUD Response: The SAFE Act distinguishes between depository institutions and nondepository mortgage lenders. The SAFE Act requires the licensing and registration, or just registration, of anyone who engages in the business of a loan originator. The determination of whether a loan originator falls under the Federal banking agencies rules for registration of loan originators, or the requirements for state licensing and registration of loan originators, is determined by whether or not the individual is an employee of a depository institution or subsidiary of a federally regulated depository institution, as that term is defined in the Act. (See 12 U.S.C. 5102(2), incorporating the definition of depository institution from section 3 of the Federal Deposit Insurance Act (FDI Act), and including credit unions.) Therefore if an institution (such as a community bank, as cited by the commenter) meets the definition of a depository institution under the FDI Act, then an individual who meets the definition of a loan originator and is an employee of that institution would be subject to the registration requirements under the final rule recently issued by the Federal banking agencies, rather than the licensing and registration requirements of this final rule Comment: HUD s provision of a default definition of employee and deference to any definition provided by the Federal banking agencies support and opposition. The majority of commenters who commented on the definition of employee supported HUD s approach of providing a default definition of employee while subjecting the default definition to any binding definition promulgated by the Federal banking agencies for purposes of the SAFE Act. One industry association stated that HUD should not cede authority to the banking agencies to craft any definition they determine appropriate. Other commenters urged HUD to alter its default definition to provide that an employee includes an independent contractor who is a loan originator for a federally regulated depository institution. Some commenters suggested 7 HUD notes that some employees of federally regulated institutions may also be subject to the state licensing and registration regime. For example, employees who act as mortgage loan originators for a bank and a nondepository subsidiary of a bank holding company that is not a subsidiary of a depository institution would be subject to both the Federal and state regimes.

9 38472 Federal Register / Vol. 76, No. 126 / Thursday, June 30, 2011 / Rules and Regulations that the definition be expanded to include only independent contractors who are exclusive agents of a federally regulated banking institution. One commenter supported the default definition s right to control test, but urged HUD to clarify that the W 2 form on which an individual s income must be reported is to be issued by the person with the right to control the individual. Others urged HUD to eliminate the W 2 requirement from its definition. One commenter asserted that because one bank has extensive in-house training for its independent contractor loan originators, who are subject to performance review and discipline by the bank, such state licensing would be unnecessary. HUD Response: HUD is maintaining, in this final rule, its approach of providing a default definition of employee and then subjecting that definition to any binding definition issued by the Federal banking agencies. HUD s approach ensures that there is no gap or overlap between the jurisdictions of state supervisory authorities or confusion over which jurisdiction governs a loan originator. Under the terms of this final rule, a state must require an individual who engages in the business of a loan originator to be state licensed, unless the individual meets HUD s definition of an employee of a federally regulated depository institution or of such an institution s federally regulated subsidiary, a credit union, or Farm Credit System institution. The Federal banking agencies final rule states that Pursuant to section 1503(11) of the SAFE Act, Agency-regulated institutions and their employees who are acting within the scope of their employment with the Agency-regulated institutions are not subject to State licensing or registration requirements for mortgage loan originators. 8 Should the Federal banking agencies provide a different binding definition, then individuals who meet that definition will be subject to registration as loan originators, and other loan originators will be subject to state licensing. While HUD s default definition reflects HUD s views about how to best define employee and thereby delineate state supervisory authorities jurisdiction, HUD s view is that it is more important to ensure that there are no gaps, overlap, or confusion concerning which jurisdiction applies to a given individual. As stated earlier in this preamble, it is HUD s position, as it was for the 8 See Federal banking agencies final rule published on July 28, 2010, at 75 FR 44657, column 3, footnote 1. Federal banking agencies in their rulemaking, that the common law right to control test and the W 2 income reporting requirements are important elements in determining who is and who is not an employee. Use of both elements is common in Federal agency practice, including HUD s practice under other programs. The depository institution s right to control the manner and means of all the loan originators work (not just those activities expressly governed by Federal banking agency regulations) is an important provision in the definition. It ensures that if a federally regulated depository institution does not have the right to control and is not responsible for every aspect of a loan originator s interactions with a consumer, then the consumer whose financial well-being is at stake will be assured that the loan originator has satisfied the more rigorous state licensing requirements, which include character and fitness, education, and testing. The W 2 requirement is important to ensure that state supervisory authorities are able to readily and efficiently determine which loan originators are subject to their state licensing requirements, and which are not, without having to undertake an extensive analysis for each individual under common law doctrine. Although the Federal banking agencies have not provided a definition of employee in their regulatory text, they stated in the preamble to their final rule (language which HUD cited earlier in this preamble) that they intend employee to have the common law meaning that includes the right to control test. They also stated that the Internal Revenue Service uses the same test to determine whether an individual is an employee and, accordingly, whether an institution must file a W 2 form for the individual. The Federal banking agencies provide for registration only of loan originators who are employees of the institutions they regulate. If HUD were to follow the suggestion of some commenters by defining employee more broadly than the meaning intended by the Federal banking agencies, such as by including independent contractors or exclusive agents, then the anomalous result would be that such individuals would be subject to neither state licensing requirements nor the Federal banking agency registration requirements. The Federal banking agencies are in a better position than HUD to evaluate whether the activities of an independent contractor working on behalf of a depository institution they regulate are subject to sufficient control and regulation such that consumers would VerDate Mar<15> :29 Jun 29, 2011 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\30JNR2.SGM 30JNR2 be as protected as if such an individual is subject to state licensing. In the event they define employee to include such individuals, HUD s definition by its own terms defers to such a banking agency definition. Rule clarification. As also noted earlier, HUD agrees with the commenter s suggested language clarifying that the W 2 form must be provided by the person that has the right to control the individual. The suggested language clarifies HUD s intended meaning, and HUD has made the suggested change in the definition of employee in Comment: Each banking agency may promulgate its own definition. Several commenters asked HUD to clarify that each Federal banking agency retains authority to define the term employee for institutions subject to its jurisdiction, rather than jointly through the Federal Financial Institutions Examination Council (FFIEC). HUD Response: The SAFE Act provides for the Federal banking agencies, jointly through the FFIEC, to develop the rules for registering employees of depository institutions and their federally regulated subsidiaries. Such an approach to promulgating regulations helps ensure for uniformity and clarity regarding which individuals are subject to registration and which are not, and HUD s definition is phrased accordingly. Although HUD defers to the Federal banking agencies to determine whether the SAFE Act permits each agency to promulgate disparate definitions of the term employee, HUD notes that the Federal banking agencies have affirmed that they all intend employee to have the common law meaning that is also used for purposes of W 2 reporting. (See Federal banking agencies final rule at 75 FR ) D. Individuals Requiring Licensing Under the SAFE Act 1. Comment: Exclude seller financing of several seller-owned properties from SAFE Act mortgage licensing. A significant portion of the comments submitted on HUD s SAFE Act proposed rule pertained to the issue of a property owner selling and financing the sale of his or her own property. Many of the comments were duplicative of one another, making the same or similar point why individuals who provide seller financing should not be subject to licensing under the SAFE Act. The following provides the various issues and situations pertaining to seller financing raised by the commenters, and

10 Federal Register / Vol. 76, No. 126 / Thursday, June 30, 2011 / Rules and Regulations for which clarification was sought with respect to licensing coverage or noncoverage under the SAFE Act. Commenters identified special situations where licensing should not be required, including: Retirees selling a limited number of investment properties; heirs selling an inherited property; sales of vacant lots; sales of homes in floodplains; property transfers resulting from divorce and health issues; sales required by natural disasters; the sale of a former residence; the sale of a home of a relative going into assisted care; persons who take back a deferred purchase money mortgage in connection with the sale of residential real property owned by, and titled in the name of, those persons; investors who provide a service to the community by providing a housing option that buyers could not otherwise obtain; home renovators who perform a valuable service by improving homes and making them available to communities; entities whose primary function is the acquisition, improvement, and sale of residences through seller-financed mortgages; and any person or company that originates and services a loan for which that person or company holds the note and does not resell the loan in the open market. Commenters stated there are negative tax consequences to not being able to finance the sale of investment properties. One commenter stated that section 453 of the Internal Revenue Code allows for the incremental reporting of gain using the installment sale method. The commenters stated that this option may no longer be available for residential investment properties if HUD s proposed rule is not clarified to exclude owner extended financing (of these properties). A commenter stated that in the case of tax foreclosure properties, many banks will not lend on the properties for the first 2 years after the foreclosure sale so that owner financing is the best way to sell them. Commenters stated that requiring seller-financers to become licensed will hamper the recovery of the housing market or harm the economy. Some commenters stated that there is a high percentage of unsold homes on the market and that many buyers are having difficulty obtaining financing from banks and institutional lenders; some of these commenters specified that an estimated 4.5 percent of Americans own three or more properties, many purchased solely as investment properties, that 40 percent of non-owner occupied residences are mobile homes, which are more difficult to sell with bank financing, and that approximately 5 percent of homes in the United States are for sale or for lease, stating that seller financing may be key to liquidating this inventory. Commenters stated that approximately 10 percent of home sales are some form of seller financing. Commenters stated that seller financing could help revitalize declining neighborhoods, and that the liquidity of the investor market depends on seller financing, and that without this exit strategy, distressed properties will not be purchased but will sit and decay, depressing neighborhoods and home values. A commenter stated that the rule will place property owners at risk of prosecution, of financial penalties, and of court revocation of equitable agreements, if they finance the sale of their own property. Some commenters stated that owner financing of nonowner-occupied properties encourages employment for tradesmen to fix the properties, provides an opportunity for older people who may want to move to get equity from their houses, and allows workers who may have to move a way to quickly sell their houses. Other commenters asked that individuals be allowed to use seller financing without being licensed for some limited number of properties in addition to their personal residence. Commenters proposed limited exceptions to the proposed rule, such as including investment properties (or a limited number of such properties) in the exclusion from licensing; allowing sales of specified numbers of sellerfinanced properties without licensing, ranging from 5 to 20 properties; exempting sellers who occasionally provide financing, with one commenter mentioning 8 or fewer properties in any 12-month period; and allowing seller financing for a limited period of time, up to 5 years, while some commenters suggested shorter periods such as 6 to 12 months, at the end of which the loan would have to be transferred to a traditional lender; this would give the buyer time to repair credit and arrange bank financing. A commenter stated that there should be an exemption for sellers who provide financing for a vacation home, second home, or rental property even if they never resided in the home, where the financing is provided for the purpose of rehabilitating and flipping the property for resale. As precedents for this proposal, this commenter cited the Truth in Lending Act (TILA) and its implementing Regulation Z, RESPA, and several state laws. Other commenters suggested that seller financing should be allowed, but VerDate Mar<15> :29 Jun 29, 2011 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\30JNR2.SGM 30JNR2 with safeguards for the buyer, such as an interest rate ceiling, a clear summary of payment terms and totals, training materials on mortgage loans, or a summary of best practices, that would be required to be provided to the borrower. A commenter stated that instead of this regulation, HUD should create a grievance committee for buyers who have been defrauded and punish individuals and reverse bad contracts. A commenter stated that HUD should set legal guidelines for all residential mortgages, whether institutional or not, to ensure that the mortgage contract and the buyer meet the same criteria institutional lenders must follow, with some wiggle room for a seller that institutions will not handle because of their internal guidelines. A commenter suggested that the rule should require a half-day class on the pros and cons of seller financing. Another commenter stated that there should be a full disclosure of the nature of the loan in all origination documents, and litigation against predatory or negligent lenders should be a black and white issue so that lenders are forced to disclose their full intentions and expected outcomes with complete transparency. HUD Response: As an initial statement, HUD confirms the commenters observation that a residential mortgage loan includes an installment sales contract, which the commenters advise is frequently involved in seller financing. Residential mortgage loans, as defined by section 1503(8) of the SAFE Act, refers to typical financing mechanisms such as mortgages and deeds of trusts. In addition, the SAFE Act definition also includes other equivalent consensual security interest on a dwelling (as the term dwelling is defined by section 103(v) of TILA) or residential real estate upon which is constructed or intended to be constructed a dwelling, which has the potential for including a broad range of other financing mechanisms. For the purposes of this rule, equivalent consensual security interests specifically include installment sales contracts, consistent with the treatment by many states of such contracts in the same manner as mortgages and purchase money mortgages offered by sellers of residential real estate. While there is no formal recorded lien held by the provider of financing, the fact that the seller holds title to the property until the contract has been paid in full is the practical equivalent of a lien for purposes of the SAFE Act and its purposes and is comparable to the status of a mortgage in a state that follows title

11 38474 Federal Register / Vol. 76, No. 126 / Thursday, June 30, 2011 / Rules and Regulations theory under mortgage law. Inclusion of installment sales contracts in the scope of the definition of residential mortgage loan is also consistent with section 103(w) of TILA and 12 CFR 226.2(a)(24) of the Federal Reserve Board s implementing regulations (Regulation Z), both of which include in the definition of residential mortgage transaction, a purchase money security interest arising under an installment sales contract. As a second matter, HUD notes that nothing in the SAFE Act rule prohibits an individual property owner from financing the sale of his or her own property, nor does the SAFE Act require an individual to become a licensed loan originator in order to provide financing in the sale of his or her property. It is equally important to note that who owns a property and who is selling a property is not determinative in deciding who is subject to licensing by the SAFE Act and who is not. The SAFE Act requires that an individual who engages in the business of a loan originator with respect to the financing be licensed. Accordingly, it is the individual who has the described interaction with the borrower or prospective borrower in regard to the financing who is subject to licensing, not the funding source, that is subject to SAFE Act licensing. A seller financing the sale of his or her own property completely avoids the issue of licensing by retaining the services of a licensed loan originator and having that individual carry out the functions that constitute engaging in the business of a loan originator. While the SAFE Act does not exclude from licensing sellers who finance the sale of properties they own, it is HUD s position, as stated earlier in this preamble, that, absent evidence to the contrary, the sale and financing of one s own residence, vacation home or property, or inherited property, such as through an installment sales contract, does not constitute engaging in the business of a loan originator and therefore generally would not require licensure under the SAFE Act. As HUD stated in the proposed rule, the frequency with which a particular seller provides financing to a buyer to facilitate the sale of the seller s own residence is so limited that Congress could not have intended to require such sellers to obtain loan originator licenses. The final rule affirms this point by adding the concept of habitualness or repetition expressly into (b) of the rule. HUD recognizes, as stated earlier in this preamble, that the difficulty for states is with a situation raised by many commenters where a property owner is providing seller financing in conjunction with sales of his or her own properties in such numbers and perhaps at such frequency that the owner appears to be engaged in the business of a loan originator. While the fact that the seller has not lived in the properties being sold would make it more likely that financing is provided in order to obtain a profit, and would therefore make it more likely that a commercial context is present, the infrequency with which a particular seller undertakes such actions, combined with the fact that it is the individual who is providing the financing (rather than a business entity that regularly provides financing), may mean that the requisite habitualness needed to constitute engag[ing] in the business of a loan originator is absent. On the other hand, for example, a builder who repeatedly acts as a loan originator in the course of selling homes he or she has constructed would almost certainly satisfy the requirements of a commercial context and habitualness or repetition and, accordingly, would be subject to SAFE Act licensing requirements. Rule change and clarification. HUD removes from (e) (which pertains to individuals not required to be licensed by states) reference to individuals who offer or negotiate terms of a residential mortgage loan only on behalf of an immediate family member of the individual and reference to an individual who only offers or negotiates terms of a residential mortgage loan that is secured by a dwelling that served as the individual s residence. HUD will move reference to individuals engaged in these activities to the Appendix that is being added to this final rule, which provides examples of individuals who should and should not be licensed under the SAFE Act. With respect to the issue of favorable tax treatment, the fact that a loan originator must be licensed does not, as far as HUD is aware, prevent anyone from taking advantage of favorable tax treatment, as suggested by a commenter. An individual who wants to sell using the installment sale method, if allowed under state law, may become licensed or work with a licensed loan originator. As far as foreclosure properties are concerned, states can take such situations into account when determining, for example, fees for licensing. With respect to the suggestions to establish borrower safeguards in lieu of loan origination licensing, nothing in the SAFE Act suggests that Congress intended to substitute borrower safeguards for licensing of loan VerDate Mar<15> :29 Jun 29, 2011 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\30JNR2.SGM 30JNR2 originators. Additionally, HUD notes that the SAFE Act is designed to establish the minimum requirement for the licensing of individuals, not entities. Therefore, licensing requirements for entities are outside of the scope of the SAFE Act. 2. Comment: Exclude financing of mobile/manufactured homes, recreational vehicles, and house boats from SAFE Act mortgage licensing. Some commenters cited mobile home, house boat, and recreational vehicle sales as a special category of transactions that, because of the difficulties of obtaining bank financing in that industry, should be exempt from any requirement for individual sellers offering financing to be licensed. Commenters stated that mobile home sellers should not be included in licensing requirements, because many state laws treat these loans as chattel mortgages and traditional mortgage requirements do not apply, the manufactured home industry is in decline and requiring licensing would hurt it more, many manufactured home sellers do a minimal amount of business, and many manufactured home sellers do nothing more than transmit paperwork between the buyer and lender. Other commenters suggested that there should be an exception for sales in small manufactured housing communities because it is difficult to obtain institutional loans, because such communities often deal in very few sales per year, and because the staff often has to discuss loan terms with buyers. A commenter stated that sometimes the manufactured housing community itself acquires title to a manufactured home and needs to be able to carry back a chattel mortgage in order to be able to resell it. Another commenter stated, to the contrary of the preceding comments, that there should be no exemption in the manufactured housing context, because the financing available to manufactured home purchasers today is through captive loan programs offered by home dealers or community owners. The commenter further stated that since these homes are not considered real property in most states, no RESPA disclosures are required, no appraisal based on comparables takes place, and no realtor advises the buyer, and that these factors underscore the importance of buyers dealing with licensed and trained professionals. Other commenters stated that originating five or fewer manufactured home loans per year should be exempt; one of these noted that the Federal banking agency rule exempts five or

12 Federal Register / Vol. 76, No. 126 / Thursday, June 30, 2011 / Rules and Regulations fewer originations per year. Some commenters stated that an individual infrequently helping consumer obtain a home loan should be exempt from SAFE Act coverage. HUD Response: As noted in a response to an earlier comment, the SAFE Act defines the term residential mortgage loan to mean any loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling (as defined in section 103(v) of the TILA) or residential real estate upon which is constructed or intended to be constructed a dwelling (as so defined). (See section 1503(8) of the SAFE Act.) Section 103(v) of TILA defines the term dwelling as follows: a residential structure or mobile home which contains one to four family housing units, or individual units of condominiums or cooperatives. Section 103(v) of TILA is implemented in Regulation Z, at 12 CFR 226.2(a)(19), which states as follows: Dwelling means a residential structure that contains 1 to 4 units, whether or not that structure is attached to property. The term includes an individual condominium unit, cooperative unit, mobile home, and trailer, if it is used as a residence. HUD does not have authority to alter the meaning of dwelling in section 103(v) and its implementing regulations. Accordingly, an individual engaging in the business of a loan originator with respect to a loan that is to be secured by a manufactured home, mobile home, recreational vehicle, house boat, or trailer that is to be used as a residence is subject to licensing under the SAFE Act. Even if a state categorizes loans secured by such residential structures as chattel mortgages, the SAFE Act covers these loans and such states must ensure that individuals engaging in the business of a loan originator with respect to these loans are licensed under the SAFE Act. As discussed above under Section B, Key Definitions: Taking an Application, Offers or Negotiates, Compensation or Gain, and Engaging in the Business of a Loan Originator, the determination of whether an individual involved in the sale of a manufactured home is covered by the SAFE Act depends upon the particular activities of the individual. In regard to the request for a de minimis exemption for manufactured home loans, as noted in HUD s response to the earlier comments on seller financing, HUD has no authority to establish a de minimis exemption for individuals who are engaged in the business of a loan originator. Unlike the provisions of the SAFE Act applicable to the Federal banking agencies, section 1505 of the SAFE Act, which involves state registration and licensing, makes no allowance for any de minimis exception. 3. Comment: Individuals involved in loan modification do not engage in the business of a loan originator under the SAFE Act. HUD specifically requested comment on whether individuals who perform loan modifications that involve offering or negotiating loan terms that are materially different from the original loan require licensing under the SAFE Act. The Federal banking agencies, in their proposed rule, also specifically requested comment on whether the definition of mortgage loan originator should cover individuals who modify existing residential mortgage loans, engage in approving loan assumptions, or engage in refinancing transactions and, if so, whether these individuals should be excluded from the definition. While a few commenters submitted that individuals engaged in mortgage loan modification and assumption transactions should be subject to SAFE Act mortgage licensing, the majority of commenters on this issue stated that these individuals should not, and do not, fall under SAFE Act coverage. In general, they stated that mortgage loan modifications and assumptions are very different from mortgage loan originations, and that employees engaged in these transactions do not meet the SAFE Act s definition of mortgage loan originator. Specifically, several commenters indicated that these employees do not take residential mortgage loan applications because, the commenters asserted, an application implies a new loan. Some commenters argued that they do not negotiate the terms of a new residential mortgage loan, because the institution or investor sets the parameters for permissible modifications and the individual has no authority to alter the terms of permitted modifications. Similarly, commenters stated that modification programs, including the Administration s Home Affordable Modification Program (HAMP), are highly prescriptive and that terms are derived by using a set percentage of gross income that applies to every borrower. Some commenters stated that in a modification the terms of a mortgage loan are not negotiated but are merely adjusted based on calculations that accommodate the borrower and mitigate the investor s losses. Other commenters stated that in a modification, an existing loan is renegotiated with the goals of mitigating any loss to the institution and, in the case of modifications, providing the VerDate Mar<15> :29 Jun 29, 2011 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\30JNR2.SGM 30JNR2 borrower with a more affordable payment option or other type of modification or, in the case of assumptions, replacing the party responsible for repaying the mortgage loan. Some commenters stated that some form of safeguard needs to be in place to protect homeowners seeking modifications, but that licensing is excessive. Commenters stated that if servicers and loss mitigation specialists had to be licensed, the costs would be high. Commenters stated that the cost to license one person in all 50 states, according to the American Financial Services Association, would be approximately $27,000. The cost of compliance for a company with 500 employees would therefore be approximately $13.5 million. Licensure would also alter the organization of loan modification activity (e.g., first-available agent), requiring that the company direct individuals to employees licensed in the state of the individual seeking the modification. Commenters also stated that the courses and examinations required to be licensed have little relevance to the tasks associated with loan modification. Commenters indicated that their employees who engage in modifications and assumptions do not ever originate mortgage loans, and that modifications and assumptions are performed in different departments of the institution. Commenters also noted that applying the SAFE Act s requirements to employees engaged in loan modifications and assumptions could significantly hamper loan modification efforts. HUD Response: HUD appreciates the many comments submitted on this issue. HUD recognizes the competing concerns raised by this issue the need to ensure that homeowners undergoing material modifications to their mortgages (i.e., generally modifications that can include a change in interest, principal, and term of loan) are assisted by individuals of integrity, experience, and competency, and the need to avoid burdening such individuals and possibly deterring assistance to troubled homeowners by placing additional requirements on loan modifiers at the very time their assistance to provide material modifications to troubled homeowners is in significant demand. HUD therefore has determined not to address this issue in this final rule, but to defer to the Bureau. If the Bureau determines that individuals engaged in modifications of loans should be required by states to be licensed under the SAFE Act, the Bureau may determine that it has authority to

13 38476 Federal Register / Vol. 76, No. 126 / Thursday, June 30, 2011 / Rules and Regulations impose such licensing requirements. As noted earlier in this preamble, the Bureau also has independent authority under the Dodd-Frank Act to regulate individuals who engage in loan modifications and loan servicing. States may also determine that such individuals are required to be licensed under the terms of state legislation. The decision to defer the issue of licensing of mortgage modifications and assumptions to the Bureau does not affect HUD s determination that refinances are covered by the SAFE Act. The Federal banking agencies, in their final rule, also provide that refinance transactions are covered by the SAFE Act. 4. Comment: Exclude from SAFE Act coverage third-party loan modification specialists. In the preamble to HUD s proposed rule, HUD also sought comment on whether third-party loan modification specialists, who offer to act as intermediaries between borrowers and their existing lenders to negotiate modifications to existing loan terms, should be required to be licensed under the SAFE Act. While several commenters expressed support for licensing of third-party loan modification specialists, others were opposed to these proposals. Some commenters argued that third-party loan modification specialists should be covered if they receive compensation directly from the borrower or if they are employed by for-profit entities, but not if they are employed by nonprofit, HUDapproved housing counseling agencies. HUD Response: HUD appreciates the many comments submitted on this issue of coverage of third-party loan modification specialists. As with loan modifications generally, HUD is leaving to the Bureau to decide whether such individuals are covered by the SAFE Act and should be licensed under the SAFE Act. 5. Comment: Clarify whether certain financial advisors are subject to SAFE Act loan originator licensing. Commenters representing securities broker-dealer companies urged HUD to withdraw the third prong defining what is included in offers or negotiates (i.e., referring or steering a borrower to a particular lender or set of terms) because, combined with some states or definition of loan originator, it would arguably subject some companies financial advisors to the SAFE Act s requirements. The commenters stated that financial advisors, as part of their employment, routinely refer clients to mortgage lenders affiliated with the advisors companies, though the advisors do not take applications. The commenters state that licensing of financial analysts who undertake the described activities goes well beyond the intent of the SAFE Act and would bring no benefit, because financial advisors are already licensed and required to pass tests that are directly relevant to their work. The likely result is that securities brokerage firms would cease their limited marketing activity of informing their customers of the availability of home financing options. Commenters stated that financial advisors who merely make their customers aware of (or refer to) a lender should not be considered loan originators under the SAFE Act. HUD Response: As explained in the above discussion of comments on the meaning of offers or negotiates, HUD declines to withdraw the third prong of its proposed definition. However, as also discussed above, HUD cautions that each of the prongs clarifying offers or negotiates must be read in conjunction with the statutory and regulatory provision that an individual must also take an application. An individual s generic referral to or recommendation of a particular lender, divorced from any receipt and consideration by the individual of the prospective borrower s application (i.e., his or her request for an offer of loan terms and information that is customary in a decision on whether to extend an offer of loan terms), would not likely trigger the third prong. Determination of whether the SAFE Act requires licensing of individuals described by the commenter would depend, in part, on whether the individual takes an application, either directly or indirectly, from the borrower or prospective borrower in conjunction with making the referral. HUD reiterates that this final rule interprets and implements the SAFE Act. HUD does not purport to interpret state laws, which may exceed the requirements of the SAFE Act, even if the state law uses language identical to that found in the SAFE Act. Accordingly, HUD cannot issue a blanket statement that all financial advisors are subject or are not subject to licensing under the SAFE Act. The activities of the individual financial advisor would need to be examined to determine whether the individual is engaged in the business of a loan originator, as a loan originator is defined in the SAFE Act and this rule. 6. Comment: Clarify the exclusion of real estate brokerage activities. A commenter asked whether a licensed real estate practitioner, who would otherwise be exempt from licensing, but receives a real estate commission from a lender selling property owned due to foreclosure or otherwise, loses the VerDate Mar<15> :29 Jun 29, 2011 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\30JNR2.SGM 30JNR2 exemption from the loan originator registration requirements. Other commenters asked whether HUD s discussion of loan modifications, which may involve a write-down of principal, means that short sales would be covered. HUD Response: Section 1503(3)(A)(iii) of the SAFE Act definition of loan originator exempts individuals performing real estate brokerage activities unless the person or entity is compensated by a lender, a mortgage broker, or other loan originator or by any agent of such lender, mortgage broker, or other loan originator; * * *. Without additional information, it is difficult for HUD to provide a definitive response to this question. However, the scenario described by the commenter would appear to be one in which the person or entity is compensated by a lender, and thus not included in the exemption for real estate brokerage activities. The fact that the lender is the owner of the property being sold and financed is not sufficient to fall under the exception for real estate brokerage activities provided by the SAFE Act. Nonetheless, even if an individual does not meet the requirements of the exemption for real estate brokerage activities, as a result of receiving compensation from the lender, it must still be determined whether the individual meets the definition of engaging in the business of a loan originator. In particular, it would have to be determined whether the individual ever takes an application and offers or negotiates terms of a residential mortgage loan (as opposed to the terms of a sale) within the meaning of the SAFE Act. 7. Comment: Government employees working in mortgage loan-related areas should be exempt from SAFE Act coverage. Commenters stated that there should be an exemption for employees of state and Federal agencies who provide mortgage loans to consumers from resources appropriated by the Federal or state government (including housing finance agencies (HFAs)), or who engage in loan origination as part of their government employment. A commenter stated that individuals employed by or under the direct supervision of state or local government agencies that deliver consumer programs, including affordable mortgages, closing cost assistance, down payment loans, and home equity loans, should not be covered. Commenters stated that Federal employees administering Federal housing loan programs and public housing homeownership programs should be exempt.

14 Federal Register / Vol. 76, No. 126 / Thursday, June 30, 2011 / Rules and Regulations Commenters stated that HUD should clarify in its final rule that municipal employees originating loans with Community Development Block Grant (CDBG) or HOME Investment Partnership (HOME) funds are not covered under the SAFE Act, and cited either the government source of the money or the existing extensive regulations in these programs. Some commenters stated that whenever an entity funds residential mortgage loans with government funds, that activity should be exempt. Several commenters stated that, in the governmental context, compensation or gain under the SAFE Act should not include repayment of administrative costs paid by Federal, state, or local governmental agencies to offset costs incurred by grantees or contractors in carrying out government-funded affordable housing programs. Other commenters stated that compensation or gain should not include wages or hourly compensation of government workers administering housing programs. A state housing and community development agency recommended that HUD clarify the terms compensation or gain to exclude administrative costs paid out by Federal, state, or local governmental agencies to offset costs incurred by grantees or contractors in carrying out government-funded affordable housing programs. Some commenters stated that the definition of compensation or gain should exclude anything of value, including reasonable administrative fees retained by government agencies, costs to reimburse for the provision of services, or that future servicing income be excluded from the definition of compensation or gain. A commenter stated that such exclusion should apply to all foreclosure prevention, downpayment assistance, and property improvement financing activities. Another commenter suggested that an element of the definition of takes a residential mortgage loan application in (c)(2)(i)(A) be revised to Presents for acceptance by a borrower or prospective borrower residential mortgage loan terms of a nongovernmental residential mortgage. HUD Response: As discussed earlier in this preamble, HUD agrees that employees of Federal, state, and local governments and HFAs providing various forms of housing assistance do not engage in the business of a loan originator, because they do not act in a commercial context. Rather, these employees act in a public or government context, and are not covered by the SAFE Act. HUD s determination is based on the distinction that even if an individual s activities are those described in the SAFE Act s definition loan originator, they may nonetheless not constitute engag[ing] in the business of a loan originator, which is the statutory standard for activities that a state is required to subject to state licensing. Specifically, the activities may not arise to engage[ing] in the business of a loan originator if they take place in a wholly public or government context, rather than in a commercial context. To ensure that all of the individual s actions in the course of acting as a loan originator are subject to the control of the agency or housing finance agency and are consistent with the agency s public or government mission, the individual must be an employee of the agency. Furthermore, if the employee acts as a loan originator in a commercial context in addition to his or her activities undertaken as an employee of the governmental agency or housing finance agency, the individual must be licensed under the SAFE Act. Some commenters have suggested that HUD s determination of whether the SAFE Act covers governmental employees should turn on the meaning of for compensation or gain, and sought to exclude the receipt of certain kinds of remuneration from the meaning of for compensation or gain. However, as discussed above, HUD construes for compensation or gain broadly and does not view as relevant distinctions about how payments or prospective payments are described or characterized by the payor or payee. HUD s determination that the SAFE Act applies to individuals who act as loan originators in a commercial context makes the distinction requested by the commenters unnecessary. In addition, it is HUD s position that the for compensation or gain test under the definition of loan originator plainly includes compensation or gain received (or expected to be received) by an individual. Accordingly, characterizations of payments made by a borrower or by a government entity to the individual s employer are not dispositive of whether the individual offers or negotiates residential mortgage loan terms for compensation or gain. 8. Comment: Exclude from coverage individuals who undertake loan origination for nonprofit organizations. Commenters stated that 501(c)(3) nonprofit organizations that help lowand moderate-income individuals obtain financing to purchase homes would not be able to continue to provide such assistance if their loan originators had to be licensed under the VerDate Mar<15> :29 Jun 29, 2011 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\30JNR2.SGM 30JNR2 SAFE Act. Commenters stated that such nonprofit organizations cannot utilize third-party brokers to originate their loans due to liability issues and that any training required to be provided to loan originators will not address the special financial and planning needs of lowincome borrowers. Commenters asserted that the SAFE Act s licensing requirements are onerous and threaten the ability of nonprofit organizations to engage in loan modification and mortgage brokering, thus depriving lowincome people of these services. Commenters requested that HUD exempt all nonprofit organizations engaged in loan origination for lowincome individuals and families that do not receive compensation for originating loans, and therefore, that such organizations be excluded from the definition of mortgage loan originator according to HUD s own interpretation of the SAFE Act. Commenters stated that these organizations have a fundamentally different mission than the commercial residential mortgage industry that the SAFE Act was meant to regulate. The commenters stated that these organizations produce affordable housing with limited resources and that compliance with the SAFE Act would be unduly burdensome. Other commenters suggested that organizations that act in the borrower s best interest to originate home loans for low-income households be exempt from SAFE Act s provisions, which would impose additional burdens on these lenders. Another commenter stated that HUD s discussion in the Commentary about noncommercial activities also applies to the lending activities of bona fide nonprofit organizations that fulfill a public, rather than commercial, purpose. The commenter suggested factors that HUD may consider in distinguishing nonprofit organizations that truly perform a public service from those that may have a commercial interest and have a commercial context to their loan origination transactions: section 501(c)(3) status, loan terms and rates offered to a borrower, compensation structure of the organization s employees, whether fees are charged to a borrower, whether the organization in fact earns a profit, whether financial literacy programs are provided along with loans, whether employees are trained, and whether the organization s primary purpose is to serve the public by helping low- to moderate-income borrowers. HUD Response: As stated earlier in this preamble, HUD has determined that employees of a bona fide nonprofit organization are outside of the range of individuals that the SAFE Act requires

15 38478 Federal Register / Vol. 76, No. 126 / Thursday, June 30, 2011 / Rules and Regulations states to subject to licensing requirements. The regulatory text provides a definition of bona fide nonprofit organization that adopts many of the factors suggested by the commenters to distinguish a bona fide nonprofit organization from other organizations. HUD s determination is based on the distinction that even if an individual s activities are equivalent to those in the SAFE Act s definition loan originator, they may nonetheless not meet the statutory requirement that one must engage in the business of a loan originator, in order for a state to be required to subject the individual to state licensing. Specifically, the activities may not arise to engage[ing] in the business of a loan originator if they take place in a wholly public or charitable context, rather than in a commercial context, as is the case with employees of government organizations and bona fide nonprofit organizations. Regulatory change. Accordingly, this final rule adds a definition of bona fide nonprofit organization that provides that a state supervisory authority may determine that an organization is a bona fide nonprofit organization, under criteria specified in the definition. The criteria include an examination of the mortgage terms offered to the borrower by an employee of a bona fide nonprofit organization and whether such terms are favorable to borrowers. If the nonprofit organization meets the criteria in HUD s definition, then the organization s employees who act as loan originators would not be engaging in the business of a loan originator, and therefore would not be subject to state licensing. HUD s definition of loan originator provides that in determining whether a nonprofit organization is a bona fide nonprofit organization, a state supervisory authority must consider, at a minimum, the following: Federal tax exempt status, purpose, incentive structure, manner of operation, and loan products offered. Finally, HUD reiterates that individuals, not entities, are subject to licensure under the SAFE Act. Therefore, any requirement in state law for the licensure of entities involved in loan origination is outside the scope of and not affected by the SAFE Act and this final rule. 9. Comment: Exclude housing counselors from SAFE Act coverage. Many commenters requested that HUD exempt from coverage of the SAFE Act individuals engaged in housing counseling activities. One commenter stated that there should be a definition distinguishing the roles of loan originators and housing counselors. Other commenters expressed concern about HUD s discussion in the proposed rule of the applicability of SAFE Act licensing to third-party loan modification specialists. These commenters worried that the result would be that a housing counselor could not contact the existing lender on behalf of a troubled borrower in order to pursue or follow up on a loan modification. Commenters recommended that the definition of loan originator explicitly exclude a counselor assisting a borrower in filling out an application, or an educator providing general information about loan applications, including helping borrowers understand their credit report. A commenter also recommended that the definition exclude lender personnel who address a homebuyer education class about how applications are reviewed and evaluated. Other commenters stated that individuals who are employed by a nonprofit and tax-exempt credit counseling organization that is approved or seeking approval for housing counseling by HUD (under 24 CFR part 214) are not covered, while individuals such as foreclosure consultants or individuals working for for-profit debt relief service providers should be covered. Commenters expressed concern that even though the housing counselors do not take applications or offer or negotiate mortgage terms, state agencies use highly fact-based and unpredictable analyses and may determine that they are covered, absent a statement to the contrary by HUD. A commenter asked HUD to clarify that a lender contributing to a homebuyer education class sponsored by a HUD counseling agency are not direct contributions to loan originator but rather to the education of future borrowers. HUD Response: HUD reiterates its lack of authority under the SAFE Act to exempt individuals engaged in the business of a loan originator. However, an individual engaging solely in traditional housing counseling services generally does not take a residential mortgage application and offer or negotiate terms of a residential mortgage loan for compensation or gain within the meaning of the SAFE Act, and this final rule and therefore would not have to be licensed under the SAFE Act. HUD has emphasized that it is the substance of an individual s activities, and not the label, profession, or job title of the individual that determines whether an individual is engaged in the business of a loan originator. Therefore, if a housing counselor is in fact engaged in the business of a loan originator, then despite the individual s professional VerDate Mar<15> :29 Jun 29, 2011 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\30JNR2.SGM 30JNR2 label as a housing counselor, the individual must be state licensed. In general, traditional housing counseling activities, such as those described in 24 CFR part 214, do not involve either taking a residential mortgage loan application or offering or negotiating residential mortgage loan terms for compensation or gain within the meaning of the SAFE Act and this final rule. For example, 24 CFR describes the provision of counseling or advice to individual clients on how to overcome specific obstacles to achieving a housing goal, as well as educational classes on the home-buying process and other topics. In addition, 24 CFR describes referrals to local, state, and Federal resources. On the other hand, it is possible that some housing counselors engage in additional activities that could subject the housing counselor to SAFE Act licensing requirements. For example, the activities of a housing counselor who acts as an intermediary between a borrower or prospective borrower and a financing source, or who presents to a prospective borrower particular loan terms identified as being prospectively available from one or more lenders to similarly situated prospective borrowers, may in some circumstances constitute taking a residential mortgage loan application or offering and negotiating terms of a residential mortgage loan. (See Section B of this preamble, Key Definitions: Taking an Application, Offers or Negotiates, Compensation or Gain, and Engaging in the Business of a Loan Originator, above.) As further discussed in Section B, merely advising or assisting a prospective borrower to properly complete a loan application, faxing documentation upon a borrower s request, or following up to ensure documentation has been received would not amount to taking an application. Similarly, a mere referral to another provider of resources would not likely amount to offering or negotiating, absent other factors as provided in this final rule. Furthermore, even if the activities of a housing counselor constitute taking a residential mortgage loan application and offering or negotiating residential mortgage loan terms for compensation or gain within the meaning of the SAFE Act and this final rule, a state may determine that the housing counselor s employer is a bona fide nonprofit organization, as discussed above in this preamble under Section D.8. Alternatively, the housing counselor s employer may be a government agency or housing finance agency. If so, the individual would not be engaging in the business of a loan originator and,

16 Federal Register / Vol. 76, No. 126 / Thursday, June 30, 2011 / Rules and Regulations accordingly, a state would not have to require licensing of the individual. Finally, in accordance with HUD s decision to defer to the Bureau on whether modifications of existing loans should be covered under the SAFE Act or otherwise, this final rule would not affect a housing counselor who contacts an existing lender on a behalf of a borrower in connection with the modification of an existing loan. 10. Comment: Clarify exclusion of attorneys from SAFE Act coverage. A commenter requested that HUD expand upon and clarify the proposed rule s provision pertaining to the SAFE Act s inapplicability to a licensed attorney who only negotiates the terms of a residential mortgage loan on behalf of a client as an ancillary matter to the attorney s representation of the client * * *. The commenter requested a definition of the term ancillary, especially with respect to attorneys representation of clients in loan modification matters. The commenter stated that it appears that such attorneys would need to be licensed as loan originators. An additional clarification is requested for licensed attorney, as well as a discussion of whether employees working under an attorney s supervision are exempt from the licensing requirement. Another commenter stated that the carve out for attorneys is not broad enough. The commenter stated that often an attorney will be in the negotiation process in ways that are more than ancillary to the representation of a client. In fact, the negotiation of the loan may be the primary reason for the involvement of the attorney. Both commenters recommended that attorneys be completely exempt from licensing under the SAFE Act. Other commenters stated that licensed attorneys and those acting under their direction to provide effective legal representation to their clients in connection with the negotiation or modification of residential mortgage loans (regardless of whether the representation is ancillary or central to the transaction) should be exempt from SAFE Act coverage. Another commenter stated that a lawyer owes the same fiduciary and confidentiality duties to the client whether or not the attorney s representation is central or ancillary, and argued that the narrow exemption proposed by HUD will adversely affect many lawyers and their ability to represent their clients effectively. Another commenter submitted that the definition of loan originator, which includes someone who negotiates terms of a mortgage for gain, would allow HUD and state agencies to regulate legal advice and other core legal services. HUD Response: HUD s proposed rule did not provide an exemption for attorneys who engage in loan origination activities, but rather recognized that the core functions of an attorney, such as providing legal advice and drafting legal documents, do not typically include acting as a loan originator. The proposed provision sought to recognize, however, that attorneys may from time to time negotiate the terms of a residential mortgage loan with a prospective lender on behalf of a client as an ancillary matter to the attorney s representation of the client. HUD stated that, for example, an attorney might assist a client in the origination of a new or refinance loan, or loan modification, as an ancillary matter to the attorney s representation of the client in a divorce. HUD emphasized that the attorney s duties to the client require the attorney to further only the client s interest and that an attorney s activities in such cases would normally be distinguishable from those of a loan originator. HUD recognizes that state authorities traditionally regulate the practice of law, rather than actions by the Federal Government. Leis v. Flynt, 439 U.S. 438, 442 (1979). The issue of whether a Federal statute may be interpreted as extending to activities that have traditionally been regulated by the states rather than the Federal Government (including the general practice of law by attorneys) has been the subject of significant legal controversy, especially when the statute does not expressly provide for extending Federal regulation into the traditionally state-regulated field. (See, e.g., Milavetz, Gallop, & Milavetz, P.A, v. United States, 130 S. Ct. 1324, (2010); BFP v. Resolution Trust Corp., 511 U.S. 531, 543 (1994); Will v. Mich. Dep t. of State Police, 491 U.S. 58, 65 (1989); American Bar Association v. Federal Trade Commission, 430 F.3d 457, (DC Cir. 2005). In requiring the licensing of individuals who engage in the business of a loan originator, Congress did not state an intention to regulate activities that constitute the practice of law by a licensed attorney. HUD is concerned that construing engaging in the business of a loan originator to encompass activities that constitute the practice of law could have negative consequences, such as interfering with regulation of the practice of law by state supreme courts, undermining important aspects of the attorney-client relationship, including the attorneyclient privilege, and hindering VerDate Mar<15> :29 Jun 29, 2011 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\30JNR2.SGM 30JNR2 consumers from being able to obtain legal representation in residential mortgage loan transactions. 9 Accordingly, doing so would undermine the statutory purposes of the SAFE Act, which include enhancement of consumer protections and reduction of regulatory burden. However, HUD is equally concerned about individuals who engage in the business of a loan originator escaping SAFE Act licensing requirements simply because they happen to be licensed as an attorney or work for a licensed attorney. The referenced provision in the proposed rule was HUD s initial approach to balancing these competing concerns, but HUD has determined that identification of an attorney s activity as ancillary to a representation is unnecessary, so long as the attorney s activity is in fact regulated by the state supreme court or other state authority as part of the practice of law. 10 Therefore, as explained in Appendix D of the rule, to the extent a licensed attorney undertakes activities that are covered by the statutory definition of loan originator, such activities do not constitute engage[ing] in the business of a loan originator, provided that: (1) Such activities are considered by the state s court of last resort (or other state governing body responsible for regulating the practice of law) to be part of the authorized practice of law within the state, (2) such activities are carried out within an attorney-client relationship, and (3) the attorney carries them out in compliance with all applicable laws, rules, ethics, and standards. Rule change and clarification. HUD removes from (e) (which pertains to individuals not required to be licensed by states) reference to a 9 Congress identified very similar concerns in setting forth the Consumer Financial Protection Bureau s authorities, which will include implementation of the SAFE Act, when it enacted the Dodd-Frank Act. (See 156 Cong. Rec. E (July 15, 2010).) In enacting the Dodd-Frank Act, however, Congress declined to provide any further clarity as to whether or not the SAFE Act is intended to apply to attorneys engaged in the practice of law. Section 1027(e) of the Dodd-Frank Act prohibits the Bureau from exercising any supervisory or enforcement authority with respect to any activity engaged in by an attorney as part of the practice of law, but also provides that this limitation on the Bureau does not apply to the extent that an attorney is otherwise subject to certain existing consumer laws, including the SAFE Act. 10 The legislative history of the Dodd-Frank Act reflects a desire to achieve a similar balance in emphasizing a determination to avoid any possible overlap between the Bureau s authority and the practice of law, but also clarifying that activities of an attorney or an individual working for an attorney that fall outside the practice of law must not be shielded from regulation by the new Bureau. 156 Cong. Rec. E

17 38480 Federal Register / Vol. 76, No. 126 / Thursday, June 30, 2011 / Rules and Regulations licensed attorney. In light of the considerations discussed above, HUD will move reference to licensed attorneys to the Appendix that is being added to this final rule. Accordingly, further elaboration or clarification of ancillary matters engaged in by a licensed attorney is no longer necessary. 11. Comment: Other requested exclusions from coverage. Commenters stated that there should be exclusions from coverage for the following: Individuals originating loans to buyers who lack capacity to meet institutional lender criteria; small, nondepository lenders who have good legal compliance records; FHA direct endorsement lenders; wholesale account executives who are not acting as loan originators; mortgage insurers; and Spanishspeaking loan originators in Puerto Rico, because many applicable legal concepts do not apply in Puerto Rico and because the loan originator exam is given in English only. One commenter said that states should be allowed to develop an expedited process for individuals who possessed a valid loan originator license or equivalent license prior to enactment of the SAFE Act. A local government agency stated that there should be additional exemptions under the SAFE Act for the following persons, who are exempt under state mortgage licensing law: persons acting as fiduciaries with Internal Revenue Code-qualified employee pensionbenefit plans, persons acting in a fiduciary capacity conferred by authority of a court of competent jurisdiction, and employees of corporate instrumentalities of the Federal Government who are not required to be registered. In contrast to these comments, a commenter stated that the target of the regulation should be private escrow officers who often do not have the requisite training or experience and who are not insured or bonded. HUD Response: The SAFE Act requires licensing and registration of any individual who engages in the business of a loan originator as defined in the Act, and, as HUD has already noted, HUD does not have authority to grant exemptions for individuals covered by the SAFE Act. The fact that a buyer may lack capacity does not render his or her loan originator exempt from licensing requirements of the SAFE Act. With respect to a Spanish loan originator exam for use in Puerto Rico, nothing in the SAFE Act or HUD s regulation precludes Puerto Rico from using such an exam, provided it is approved by the NMLSR. With respect to an expedited process, states can expedite or otherwise reduce the burdensomeness of the process for individuals registered under a predecessor loan originator licensing law, so long as a state supervisory authority finds that there is sufficient evidence that all of the requirements for licensing and registration, including the educational requirements, of the SAFE Act are met. However, nothing in the SAFE Act would allow for any exception to the basic statutory requirements of the Act. With respect to exclusions for various fiduciaries, HUD reiterates that it has no authority to exempt covered individuals, but urges states to apply the statutory criteria, as clarified by this rule, to determine whether the cited individuals are in fact engaged in the business of a loan originator. In the case of employees of a federally chartered corporation that does not meet the definition of a housing finance agency, loan origination activities would be covered by the SAFE Act. With respect to escrow officers, the issue, again, is whether such individuals are engaged in the business of a loan originator as defined in the SAFE Act. Coverage is determined by the activities rather than by the professional title of the individual involved. 12. Comment: De minimis exemption requested. A commenter encouraged HUD to follow the recommendation of the Federal banking agencies and consider a de minimis exception. The commenter noted that the Federal banking agencies, in their draft final rule, provide that a person who does not regularly or principally function as a loan originator, for example has acted as a loan originator for five or fewer residential mortgage loans in the past 12 months, is not subject to the SAFE Act. HUD should also consider exempting small manufactured housing communities that may take very few applications in a 12-month period. HUD Response: As discussed above, the SAFE Act authorized the Federal banking agencies to provide a de minimis exemption for individuals engaged in the business of a loan originator, but did not grant such authority to HUD. E. Other Definitions 1. Comment: Revise the definition of State. A commenter stated that the definition of State should be revised by removing the reference to the Trust Territory of the Pacific Islands. HUD Response: Although the term State is defined in the SAFE Act to include the Trust Territory of the Pacific Islands, HUD has removed VerDate Mar<15> :29 Jun 29, 2011 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\30JNR2.SGM 30JNR2 reference to the Trust Territory of the Pacific Islands since this is no longer a U.S. territory or jurisdiction and HUD therefore has no jurisdiction to enforce compliance with the SAFE Act. 2. Comment: Expand definition of family. A commenter stated that the term immediate family member in (e)(4) should be revised to state simply family member and be defined to include an individual s spouse, child, child s spouse, parent, sibling, grandparent, grandchild, or grandchild s spouse. The commenter stated that the result of such a change would be to expand the category of relatives to whom, or on whose behalf, an individual may offer or negotiate loan terms without having to be subject to state licensing requirements. HUD Response: Since HUD is no longer including in (e) reference to individuals who are not statutorily exempt from licensing under the SAFE Act, there is no longer a need to define family. F. License Eligibility: Felonies 1. Comment: Felony conviction within 7 years limits employment opportunities. Several commenters stated that the prohibition on issuing licenses to individuals who have been convicted of felonies within the preceding 7 years, even felonies that are unrelated to fraud, may significantly limit employment opportunity. HUD Response: Section 1505(b)(2) of the SAFE Act explicitly prohibits the issuance of a license to an applicant who has been convicted of a felony within 7 years prior to submission of an application. This limitation is a statutory restriction, so elimination of the requirement is beyond the scope of HUD s authority. 2. Comment: Pardoned convictions are not generally treated as legal nullities. A commenter disagreed with HUD s assertion that pardoned convictions are generally treated as legal nullities. The commenter states that this is a misunderstanding, citing case law, and asserts that a pardon merely relieves legal disabilities and stigma that result from convictions. The commenter also notes that other Federal agencies have taken an approach to state relief that differs from HUD s, and questions the policy implications of limiting HUD relief to pardons. The commenter recommends that HUD withdraw (b)(2)(ii) of the proposed rule, or that it expand it to include other forms of state relief, similar to the provision in the Federal Firearms Act, 18 U.S.C. 921(a)(20). Other commenters suggested that (b)(2)(i) be removed and the effect of expungement

18 Federal Register / Vol. 76, No. 126 / Thursday, June 30, 2011 / Rules and Regulations of a felony should be determined by the states. Several industry associations state that HUD should simply repeat the minimum requirements and leave it to the states to determine how they are to treat expungements. However, HUD could urge uniform treatment. Other commenters suggested that due to significant state oversight of the expungement process, expungements should receive the same treatment as pardons under the Act. A commenter states that in many states, an expungement is viewed to completely eliminate the occurrence of the criminal incident, as well as any punishment incurred as a result of the act. As raised by one commenter, in some states the submission of an expunged conviction could cause the individual to incur state sanctions. The commenter urged HUD to adopt FDIC s policy with regard to expunged and juvenile convictions as provided in the FDIC Statement of Policy for Section 19 of the FDIC Act, 63 FR (Dec. 1, 1998). HUD Response: The case law cited by the commenter provides that a pardon relieves the convicted from punishment for the conviction rather than eliminating any issue of guilt for the underlying conduct. The case law further states that the pardoning of a conviction does not prohibit a state from evaluating whether the conduct that led to the conviction renders the individual unfit for the profession in question, so long as denial is not based on the mere fact of a conviction alone. Section (b)(2)(ii) has been revised to provide that in the case of a pardoned conviction, the fact of the conviction alone does not automatically disqualify the individual under the SAFE Act s felony provisions at 12 U.S.C. 5104(b)(2). A state supervisory authority, however, may still consider the conduct underlying the conviction when it makes the required determination of financial responsibility, character, and general fitness. Therefore, under HUD s final rule, a state will not be required to provide that a pardoned conviction renders an individual ineligible for licensing. HUD leaves that determination to the states. Additionally, HUD will not consider an expunged conviction to render an individual ineligible to be licensed under the SAFE Act. In general, an expungement is viewed to completely eliminate the conviction in the eyes of the law and to prevent further legal consequences of the conviction. As raised by one commenter, in some states the submission of an expunged conviction could cause the individual to incur state sanctions. Section (b)(2) is revised accordingly. As in the case of pardoned convictions, the revised regulatory provision does not prohibit a state that becomes aware of the conduct that led to the conviction from evaluating whether the conduct renders the individual unfit for the profession in question. Rule change. To reflect this distinction, (b)(2) is revised to provide that pardoned and expunged convictions do not in themselves render an individual ineligible. 3. Comment: Question of authority to create any exemption for disqualification of individuals with felony convictions. A commenter questioned HUD s authority to create any exemption under section 1505 regarding the categorical disqualification of individuals with felony convictions. The commenter noted that the SAFE Act does not provide authority to HUD to create an exemption to the unambiguous ban in section 1505(b)(2), and HUD does not claim any inherent authority to create one. Some commenters suggested that the exemption section should either be removed from the rule or modified in some way, such as by seeking authority for a legislative waiver to be triggered by an application from a state licensing board. HUD Response: HUD is not exercising any exemption authority, but rather seeks to clarify meaning to terms used in the SAFE Act to ensure that the type of licensing contemplated by the SAFE Act is instituted as uniformly as possible across the states. Expunged and pardoned convictions are often not considered to be disqualifying convictions or convictions of record under analogous requirements governing other professional licensing and consumer protection regimes. As stated in response to an earlier comment, HUD s position is that pardoned and expunged convictions do not in themselves render an individual ineligible. G. License Eligibility: Credit Reports, Credit Scores, Financial Responsibility, and Character and Fitness 1. Comment: Authorize NMLS to obtain credit report. A commenter stated that the proposed rule should be revised at the final rule stage to allow applicants to authorize NMLS to obtain a credit report and information on administrative, civil, or criminal findings. HUD Response: Rule change. In the final rule, HUD has revised (h) to allow applicants to submit authorizations for NMLS to obtain credit reports and records of VerDate Mar<15> :29 Jun 29, 2011 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\30JNR2.SGM 30JNR2 administrative, civil, and criminal findings. This revision reflects the specific requirements of section 1505(a) of the SAFE Act. 2. Comment: Credit scores should not be a licensing requirement. Some commenters stated that credit scores should not be a requirement for licensing, or should not be determinative of license eligibility. HUD Response: The SAFE Act requires license applicants to authorize the NMLS to obtain an independent credit report of the applicant. The final rule reflects this requirement. If a credit report includes a credit score, a state supervisory authority may decide that it is appropriate to consider the score and other information in the credit report as factors in its overall character and fitness determination. 3. Comment: Public release of credit reports will subject individuals to identity theft. One commenter expressed concern that if credit reports are made public, individuals could be vulnerable to identity theft. HUD Response: HUD is maintaining its approach to confidentiality of information in the final rule, in This approach is consistent with section 1512 of the SAFE Act, which addresses the applicability of state and Federal privacy laws to materials submitted to state regulators and the NMLSR. The SAFE Act does not provide for public disclosure of an individual s credit report or credit score. The information that the SAFE Act requires to be made available to the public includes employment history and publicly adjudicated disciplinary and enforcement actions. 4. Comment: Testing requirements need to be clarified. One commenter stated that proposed rule s description of testing requirements is ambiguous. First, the commenter noted that the number of times an individual may retake a licensing test is unclear. Second, the commenter indicated that language covering retesting for loan originators with lapsed licenses is ambiguous, in that an individual with a lapsed license is not a state licensed loan originator, but rather a formerly state licensed loan originator. HUD Response: HUD is maintaining the restrictions on the timing of retests in the final rule. HUD agrees that the SAFE Act is confusing on this point, in that it states under Initial Retests that an individual may retake a test three consecutive times, with each consecutive test occurring at least 30 days after the preceding test, but then under Subsequent retests states that after failing three consecutive tests, the individual must wait 6 months

19 38482 Federal Register / Vol. 76, No. 126 / Thursday, June 30, 2011 / Rules and Regulations before retaking the test. HUD resolved this confusion in the proposed rule by providing in (e)(2) that an individual may take a test three times (i.e., the first taking plus two retests), with each retest occurring at least 30- days after the preceding test. If the individual fails three consecutive tests, the individual must wait 6 months before taking the test again. (That is, the third retake must satisfy both the individual 30 day waiting period of SAFE Act section 1505(d)(3)(B) and the 6-month waiting period of section 1505(d)(3)(C), which is to say it cannot occur until after a 6-month waiting period.) HUD believes that the rule is clear on the number of times a test can be taken. Rule change. To address the second comment, HUD has modified the language covering retesting for loan originators with lapsed licenses. Additionally, the regulatory text of the proposed rule inadvertently omitted reference to time spent as a registered loan originator and the final rule inserts such reference. In the final rule, (e)(3) provides that if a formerly state licensed loan originator fails to maintain a valid license for 5 years or longer, and not taking into account any time during which the individual is a registered loan originator, the individual must retake the test and achieve a test score of not less than 75 percent correct answers. 5. Comment: Provide flexibility with respect to credit for continuing education courses. A commenter stated that the final rule should authorize state officials to allow continuing education courses to be credited for the previous year when an applicant seeks to renew his or her license during an authorized license reinstatement period. The commenter notes that this would match provisions in the CSBS/AARMR Model State Law. HUD Response: In order to avoid any confusion that may have arisen from the phrasing of the subject provision in the proposed rule, HUD is revising the language in the final rule to include the statutory language and then provide additional clarifying language. Rule change. Accordingly, (b) now provides that a state must provide that a state-licensed loan originator may only receive credit for a continuing education course in the year in which the course is taken. HUD understands the statutory provision to mean that a state-licensed loan originator who fails to meet the continuing education requirements before the expiration of his or license may not renew his or her license until he or she meets the requirement. That is, the loan originator cannot renew his or her license based on a promise to take the required classes in a future year, on the theory that it does not matter when the classes are taken, so long as they are taken at some point. Similarly, the provision means that an individual cannot claim that excess classes taken in a past year relieve the individual of having to take classes required for a future year. Rule clarification. Accordingly, (b) now also clarifies that a state-licensed loan originator may not apply credits for education courses taken in one year to meet the continuing education requirements of subsequent years. Provided that a state does not permit an individual to renew his or her license prior to taking the required continuing education classes, HUD does not believe the provision prohibits a state from allowing an individual to make up a deficiency from a past year by taking classes in a present or future year. H. Reciprocity and Promoting Uniformity Comment: Permit or require recognition of other state licensing of loan originators. Several commenters suggested that HUD should permit or require recognition of the licensure of other states to facilitate competition and ultimately lower consumer costs, without compromising the standards demanded under the SAFE Act. Commenters also noted that HUD should call for uniformity in its rules and require in the rules a regular process of consultation with trade associations and state and Federal regulators to develop solutions where uniformity is lacking. HUD Response: HUD s final rule does not require reciprocity, given the current variability in state laws. The SAFE Act sets the minimum requirements for the licensing of loan originators and does not allow HUD to preempt any state law requirements or to establish a maximum requirement. This final rule provides that a state must require an individual to obtain and maintain a license from that state in order to engage in the business of a loan originator with respect to any dwelling or residential real estate in that state. This final rule further provides that in order to grant a license to an individual, the state might find that the individual has satisfied the minimum eligibility requirements. HUD believes this approach is consistent with the SAFE Act s preference that states implement their respective licensing regimes and the SAFE Act s establishment of minimum, rather than preemptive and VerDate Mar<15> :29 Jun 29, 2011 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\30JNR2.SGM 30JNR2 uniform requirements. The approach also avoids incentivizing a race to the bottom among states. However, this final rule does not limit the extent to which a state may take into consideration or rely upon the findings made by another state in determining whether an individual is eligible under its own laws. HUD will seek to promote uniform minimum standards in accordance with its overall responsibility for interpretation, implementation, and compliance with the SAFE Act. However, the SAFE Act s preference that states implement and enforce licensing, combined with the absence of preemptive authority over states that opt to exceed the minimum requirements, means that there will inevitably be a diversity of approaches among states. HUD has worked extensively with the CSBS and AARMR in this process, and will remain accessible to state regulators, other Federal regulators, and trade associations. I. State Agency Performance Standards and Other Minimum Requirements 1. Comment: Not all state authorities will be able to participate in the NMLSR. Commenters stated that not all states or state authorities that oversee mortgage lending participate in the NMLSR. Therefore, (a)(1) should be revised to reference applicable supervisory authorities, or to require that all authorities participate in the NMLSR. One commenter suggested that HUD consider a system that could be tracked by Freddie Mac/Fannie Mae and individual lenders using CHUMS and SAR ID numbers given to underwriters by FHA and the Department of Veterans Affairs and tied to individual s Social Security Numbers and tracked through Neighborhood Watch for default trends, etc. HUD Response: The SAFE Act provides in section 1508 that, in a case where the Secretary determines that a state does not have in place by law or regulation a system for licensing and registering loan originators that meets the requirements of sections 1505 and 1506 and subsection (d) of this section, or does not participate in the Nationwide Mortgage Licensing System and Registry, HUD shall provide for a system of licensing and registration of loan originators operating in the state. Thus, the statute requires the use of the NMLSR or a HUD-established backup system for loan originator licensing and registration, rather than miscellaneous local authorities. In addition, section 1508(d) of the SAFE Act establishes the minimum requirements that a state licensing law must meet. Because HUD

20 Federal Register / Vol. 76, No. 126 / Thursday, June 30, 2011 / Rules and Regulations must implement the SAFE Act as enacted, HUD declines to adopt the commenters alternate suggestions. In regard to the use of the term applicable supervisory authority, HUD notes that the SAFE Act uses the term a state loan originator supervisory authority. HUD does not construe this statutory term to mean that a state may have only one supervisory authority, or that if it has multiple such supervisory authorities supervising various categories of loan originators, only one supervisory authority must comply with the SAFE Act. 2. Comment: HUD should recognize that examinations on the level of the mortgage company may satisfy the requirement to examine and investigate loan originator licensees. A commenter states that many states conduct examinations on a company level and that such examinations include examinations of the company s loan originators. HUD should recognize that this approach satisfies the requirement to examine loan originators at (a)(4). HUD Response: HUD agrees that nothing in the SAFE Act or this final rule requires dual or separate examinations of loan originators, if a state already examines loan originators in the course of examining companies, provided that the state s approach ensures that no loan originators are systematically left out of the scope of examinations. 3. Comment: Reports of condition may be submitted at the company level. A commenter observed that the SAFE Act requires licensees to submit reports of condition (call reports), rather than loan originators. Since licensee is not defined in the SAFE Act, the commenter states that it should be understood to refer to companies and asks HUD to recognize that call reports may be submitted at the company level. HUD Response: HUD understands that reports of condition, or call reports, are customarily produced and submitted to regulators at the company level. The only persons who are subject to licensing under the SAFE Act are individuals, not companies. Accordingly, this final rule requires states to require licensed loan originators (i.e., the only licensees under the SAFE Act) to ensure that loans that close as a result of the loan originator s activities are included in the reports of condition that are submitted to the NMLSR. HUD believes this language permits and even anticipates that the reports are submitted by a person other than the loan originator, such as at the company level. The regulatory provision at (f) requires states to impose responsibility for inclusion of loans in the report on the individual loan originator, but it does not prohibit a state from imposing concurrent or even primary responsibility for the inclusion and submission on a company, provided that the state s approach ensures that no loan originator s closed loans are systematically left out of the reporting requirement. J. Delayed Effective Date or Moratorium on Enforcement Comment: Provide for significant delayed effective date for regulations. Commenters asked HUD to delay the effective date of the proposed regulations or to approve a temporary moratorium on enforcement. Some commenters requested moratoriums for specific industries on a national basis. As justifications for a delay or moratorium, commenters referenced the timing of HUD s regulations, the barriers to compliance facing particular industries, and the need to amend state laws. Some commenters requested expanding proposed rule (d), which allows states to delay the effective date for persons solely performing certain loan modifications, to include persons conducting loan modifications outside the Making Home Affordable program. HUD Response: HUD is maintaining the proposed rule s approach to the approval of delays in the effective date of state requirements. Under the proposed rule, a state may request a later effective date by demonstrating that a substantial number of loan originators, or a particular class of loan originators, will face unusual hardship. HUD believes this process will appropriately address hardships faced by the concerned industries. The process is also consistent with the SAFE Act s goal of establishing state-based mortgage licensing systems. However, HUD recognizes there has been uncertainty regarding the meaning of certain terms that affect the scope of the SAFE Act s coverage, and that coverage of certain classes of individuals may not have been determinable prior to the issuance of this final rule. To the extent this final rule clarifies coverage of individuals who previously did not have a reasonable basis for determining whether they were covered, HUD will work with states to establish reasonable time frames for implementing coverage of such individuals, and for such individuals to meet eligibility VerDate Mar<15> :29 Jun 29, 2011 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\30JNR2.SGM 30JNR2 requirements. 11 Section (c) of this final rule provides a method for states to request extensions for such individuals or classes of individuals. As stated above, a state may request a delayed effective date by demonstrating that a substantial number of loan originators, or a particular class of loan originators, will face unusual hardship in meeting SAFE Act requirements. Additionally, HUD s ability to grant extensions for good-faith efforts to comply with SAFE Act requirements may have applicability. Rule change. HUD is withdrawing the proposed delayed effective date for loan originators participating in the Home Affordable Modification Program (HAMP). That delay was proposed in combination with HUD s inclination to cover material modifications of existing residential mortgage loans. In accordance with HUD s decision to defer to the new Bureau on the question of covering material modifications, the delayed effective date for loan originators participating in the HAMP program is unnecessary. In addition, the proposed rule s dates by which states were to require individuals to obtain licenses have since passed. Accordingly, the dates for such compliance in (a) and (b) have been replaced with the effective date of this final rule. As discussed above, however, (c) provides for the possibility of extended compliance dates for individuals who could not reasonably have anticipated that they would be covered until publication of this final rule. K. HUD s Regulation and Review of States for Compliance 1. Comment: HUD must prohibit states from exceeding the SAFE Act s minimum requirements. Some commenters asked HUD to ensure that states not overreach their SAFE authority by, for example, imposing licensing requirements that go beyond the SAFE Act s minimum requirements by using credit reports to make licensing decisions. HUD Response: As discussed previously, the SAFE Act establishes minimum standards for licensing of loan originators, and does not prohibit states from exceeding these requirements. 2. Comment: Expand enforcement procedures for states noncompliance. A commenter suggested that HUD expand the proposed regulations to include 11 See HUD s Frequently Asked Questions on this issue at sfacimpdel.pdf.

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